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User ID: 5353
6/16/2005 2:44 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
User ID: 16476
6/16/2005
2:40 am EDT Re: Have you noticed that every media outlet has a warning on the "HOUSING BUBBLE"
All I see is a monstrous pay-cut for the average worker without them even being the wiser.
I was taught (in school, of all places) that you should allot no more than 25% of your income to rent or mortage payments, and that if you buy a house it should cost about 2x your annual salary.
That formula makes my neighborhood priced roughly 3 times what it should be. Damn right there´s a bubble, they just now noticed? |
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User ID: 6244
6/16/2005 9:06 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Arlene (16 June 2005)
"PRIDE GOETH BEFORE DESTRUCTION"
Click here: Rich-poor gap gaining attention | csmonitor.com
Greetings to all, in His grace and blessings,,,,
PRIDE GOETH BEFORE DESTRUCTION
Recently I described to you one of the consequences of introducing new, printed money into an economy. That being, that the gap widens between the rich and the poor, resulting in the "black horse" of Revelation - the poor man working a whole day for a loaf of bread, while the rich, elite, continue to enjoy their "oil and wine",,,,i.e., luxuries.
I am not a Christian Scientist, but the above article tells about our fed chairman Alan Greenspan´s "concern" about the widening gap between the rich and the poor. Mr. Greenspan is well aware of the consequences of printing money and causing the type of global inflation that we are seeing....... This destroys the middle class in the final stages of an inflationary cycle....But what caught my notice, was his statement at the end of the article:
"But you can´t get around the fact that this is the most extraordinarily successful economy in history."
This statement caught my eye, because of the admonition in the scriptures that "pride goeth before destruction".....and it just seems to me that the above statement from the man who has orchestrated this massive betrayal of the working people of the world, is just a tad "prideful"........When old Nebbie bragged about how "he" had built up Babylon, God sent him packing out to the fields to chew grass like an ox for some seven years. Watch for these statements of "pride" from our leaders, and see if you can see the handwriting on the wall "you are weighed in the balance and found wanting...".....that handwriting appeared on the wall of the banquet hall, while Nebbie´s son Belshazzar, was partying and living it up......by morning, he, too, was toast.........
Just a thought........Your sister in Christ......Arlene |
| FHL(C)
User ID: 6244
6/17/2005 5:23 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use:
True Wealth Logo
Imagine with me that we could create the ideal money system, using only the Bible and the constitution as our source... What would it look like? Would it consist of paper money, electronic credit/debt money, OR silver and gold money?
Today, we are witnessing the END of a monetary age. Economists have already announced to the media the decline (and soon death) of paper money. Credit card companies, like MasterCard, are now boldly proclaiming that THEY are "The Money of the Future." While it´s true that they offer convenience, near universal acceptance, and simple accounting, there is another element still missing from both paper currency AND credit/debit cards -- Neither offer ANY long term STORE of VALUE.
Even the newest "SmartCards" (to be offered in the US within a year) will also fail at maintaining your buying power.In the future, money may take on a new form but, without a store of value, without substance, and still buy less over time. This loss of buying power is called inflation -- and economists acknowledge that today it´s crushing the middle class in America.
The government and mass media want you to believe that inflation is under control and nearly dead. DON´T believe it! Government inflation numbers are not trustworthy because they don´t accurately reflect real cost of living increases. An ideal money system must offer protection from the inflationary risks resulting from politicians, bankers, and financial market "bubbles." Before we take the final leap of faith into a 100% cashless society, let´s look to the Bible, the Constitution, and history for a solution to inflation.
History teaches us that every paper currency eventually returns to its TRUE value, ZERO! Yet, never once in history has silver or gold ever been discarded as worthless.(Keep in mind that a 100 % silver and gold-backed money system did work in this nation, as recently as 100 years ago.During this "golden era," our money maintained its value, in fact, in it actually increased in value!).
Throughout 6,000 years of recorded history, GOLD has always emerged as the spontaneous preference of truly free markets because politicians and bankers simply cannot print gold. HOW can we reverse the hundred-year trend that has pushed money away from being a valuable, physical commodity to becoming 100% valueless? I have a few suggestions:
1. Start by studying God´s best design for a money system of using silver and gold (I´ve found over 783 verses from Genesis to Revelation discussing silver, gold, and money.)
2. Then reread Art. 1 Sec. 8 of the U.S. Constitution.It states our Founding Fathers’ best design for a silver and gold money system..
3. Expect a silver and gold-backed money system to re-emerge on the Internet. Technology is now opening new doors for a privately administered money system to emerge that will successfully compete with both paper and credit systems.
4. Place some silver or gold coins in your hand and you´ll discover why it is true wealth. It has substance!
Remember: True wealth is ALWAYS based on substance, NOT symbolism.
© 1997 by FAME
Questions or comments about this site?
Contact webmaster@true-wealth.com
[link to freewordofgod.yuku.com] |
| Defiler
User ID: 13032
6/17/2005 5:28 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Maybe next time you´ll have a point of refference... |
| FHL(C)
User ID: 6244
6/17/2005 5:29 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Thanks CAPF
J.P. MORGAN WILL PAY $2.2 BILLION TO SETTLE ENRON LAWSUIT, thus establishing that the so-called Enron scandal was not the work of one man, but rather a conspiracy run by the some of the largest banks in the world. The payment was in response to a class-action lawsuit filed by investors of Enron Corp. The suit accuses a group of Wall Street banks and securities firms of misleading investors by helping Enron engineer transactions that improperly removed billions of dollars of debt from its balance sheet. J.P. Morgan is accused of, among other things, helping Enron falsify its financial statements and hide debt, while the bank´s analysts were issuing falsely positive and misleading reports. The bank underwrote Enron securities and lent more than $1 billion to the company, while helping to syndicate more than $4 billion of bank loans.
Last week, Citigroup Inc. agreed to pay $2 billion in the same case. Other firms, including Bank of America Corp. and Lehman Brothers Holdings, Inc. have already settled for a combined $491.5 million. Several other firms have yet to settle. These include Merrill Lynch & Co., Credit Suisse First Boston, Barclays PLC, Toronoto-Dominion Bank, Royal Bank of Canada, Royal Bank of Scotland Group PLC, Goldman Sachs Group Inc, and Deutsche Bank.
This suit is just one of numerous lawsuits tied to Enron´s collapse. J.P. Morgan, Citigroup, Merrill Lynch, CSFB, and Bank of America recently agreed to pay the Retirement Systems of Alabama $49 million to settle a separate lawsuit related to the pension fund´s losses from Enron.
J.P. Morgan also was forced to reach a $2 billion settlement in March with respect to World-Com, now known as MCI.
The same firms are also facing lawsuits for their roles in several other corporate scandals, including the downfall of Italian dairy concern Parmalat, SpA.
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 6244
6/17/2005 5:31 AM | | FHL(C)
User ID: 6244
6/17/2005 5:35 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Italians consider trashing euro, returning to lira
By John Phillips
THE WASHINGTON TIMES
June 15, 2005
ROME -- Italians, once among the most enthusiastic supporters of a united Europe, are becoming increasingly disillusioned, so much so that some are suggesting that Italy dump the euro and bring back the lira.
Roberto Castelli, the silver-haired Italian justice minister from the Northern League, a major coalition partner in the government of Silvio Berlusconi, said his party will present concrete proposals this week for calling a referendum on ditching the euro.
"Does [the British pound] sterling have no economic foundation because it is outside the euro?" he asked. "Is Denmark living in absolute poverty because it is outside the euro? Are Swedes poor because they are outside the euro?"
Italian discontent with the euro marks the latest crisis to rattle the quest for European unity.
British Prime Minister Tony Blair and French President Jacques Chirac have been locked in a bitter public feud ahead of European budget summit this week and the Continent is reeling from the rejection of a proposed constitution by French and Dutch voters.
A chain of Tuscan supermarkets has been enjoying a surge in business after pledging to accept the lira alongside the euro, cashing in on Italians who blame the single currency for rising prices and a slumping economy.
Polls show that as many as 27 percent of Italians are ready to dump the common European currency. Italy´s minister of economy and finance, Domenico Siniscalco, has bluntly rejected the suggestions.
Mr. Siniscalco insists that "Italy´s currency is the euro," but Mr. Berlusconi´s Forza Italia party also contains a euro-sceptic wing inspired by counterparts in Britain´s Conservative party suspicious of ceding sovereignty in Brussels.
The "post-Fascist" National Alliance party founded by former admirers of the wartime nationalist dictator, Benito Mussolini, also has traditionally been wary of European integration.
Politicians in Rome have been openly discussing the "exit option" as their country slides deeper into recession.
Italian newspapers report that hedge funds are calling in lawyers to check on legal options if Italy decides to replace the euro with a "new lira" as the currency of denomination for Italian bonds.
Northern League firebrands such as Roberto Calderoli, the minister for social welfare, blame Italy´s left-wing opposition leader, Romano Prodi, for the poor performance of the economy since he was heavily involved in the introduction of the euro as Italian prime minister first and later as European Union Commission president.
Mr. Prodi defended his role and that of Italy´s president, Carlo Azeglio Ciampi in introducing the euro.
"I must tell you I am proud of having taken Italy into the euro, along with the then treasury minister, Carlo Azeglio Ciampi," Mr. Prodi said. "The euro has given new energy to the country and allowed young people to get a mortgage for their house by lowering interest rates and inflation, and putting Italy back in line."
Nevertheless, government economists say privately Italy could gain short-term economic benefits from leaving the euro.
By devaluing its currency, Italy could immediately boost exports, jobs and manufacturing investment. The real value of Italy´s massive public debt, equivalent to some 105 percent of gross domestic product, could be slashed by devaluation.
EU leaders are furious about rebellious Italian dissatisfaction with the single currency. "It is just inconceivable that a country could envisage dropping out of the euro," said Jean-Claude Juncker, the prime minister of postage-stamp-sized Luxembourg, which is currently the revolving European Union president.
The European Central Bank president, Jean-Claude Trichet, said talking about dropping the euro is "complete nonsense." Economists close to Mr. Prodi believe the best way to combat underconsumption and unemployment, not only in Italy but throughout Europe, would be a bold reduction in interest rates, at least to the emergency level of one percent that revived the U.S. economy in 2003, if not to zero as in Switzerland and Japan.
But with a general election looming in Italy next year, Mr. Berlusconi fears losing the support of the Northern League, which brought his previous government down in 1994 by leaving the center-right coalition.
Mr. Berlusconi has stopped short of contradicting the flamboyant Northern League ministers on the euro, fueling speculation that to retain power he may yet be plotting to precipitate the breakup of the euro, which could herald the death of the European Union. Subscribe
[link to www.washtimes.com]
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| .
User ID: 8583
6/20/2005 2:37 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
How long before people make their governments bankrupt the banks and let the people keep their possessions, admittedly at a much lower value, maybe never?, YHVH knows.
House prices
After the fall
Jun 16th 2005
From The Economist print edition
Soaring house prices have given a huge boost to the world economy. What happens when they drop?
PERHAPS the best evidence that America´s house prices have reached dangerous levels is the fact that house-buying mania has been plastered on the front of virtually every American newspaper and magazine over the past month. Such bubble-talk hardly comes as a surprise to our readers. We have been warning for some time that the price of housing was rising at an alarming rate all around the globe, including in America. Now that others have noticed as well, the day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years.
This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history (see article). The bigger the boom, the bigger the eventual bust.
Throughout history, financial bubbles—whether in houses, equities or tulip bulbs—have continued to inflate for longer than rational folk believed possible. In many countries around the globe, house prices are already at record levels in relation to rents and incomes. But, as demonstrated by dotcom shares at the end of the 1990s, some prices could yet rise even higher. It is impossible to predict when prices will turn. Yet turn they will. Prices are already sliding in Australia and Britain. America´s housing market may be a year or so behind.
The global housing boom
Jun 16th 2005
Economic slowdown
Jun 9th 2005
The frothy housing market
May 26th 2005
America´s economy
Asian economies
Britain´s economy
Property
Federal Reserve, Reserve Bank of Australia, Bank of England, IMF
Many people protest that house prices are less vulnerable to a meltdown. Houses, they argue, are not paper wealth like shares; you can live in them. Houses cannot be sold as quickly as shares, making a price crash less likely. It is true that house prices do not plummet like a brick. They tend to drift downwards, more like a brick with a parachute attached. But when they land, it still hurts. And there is a troubling similarity between the house-price boom and the dotcom bubble: investors have been buying houses even though rents will not cover their interest payments, purely in the expectation of large capital gains—just as investors bought shares in profitless firms in the late 1990s, simply because prices were rising.
Homes as cash machines
One other big difference between houses and shares is more cause for concern than comfort: people are much more likely to borrow to buy a house than to buy shares. In most countries, the recent surge in house prices has gone hand-in-hand with a much larger jump in household debt than in previous booms. Not only are new buyers taking out bigger mortgages, but existing owners have increased their mortgages to turn capital gains into cash which they can spend. As a result of such borrowing, housing booms tend to be more dangerous than stockmarket bubbles, and are often followed by periods of prolonged economic weakness. A study by the IMF found that output losses after house-price busts in rich countries have, on average, been twice as large as those after stockmarket crashes, and usually result in a recession.
The economic damage this time could be worse than in the past because house prices are more likely to fall in nominal, not just real terms. Not only do houses in many countries look more overvalued than at previous peaks, but with inflation so low, prices would have to stay flat for at least a decade to bring real prices back to long-run average values. Most important of all, in many countries this house-price boom has been driven far more by investors than in the past, and if prices start to dip, they are more likely to sell than owner-occupiers. In America this could mean the first fall in average house prices since the Great Depression. Owners who have been using their home like an ATM to extract cash, or who were relying on rising house prices to provide them with a comfortable pension, will suddenly realise that they need to start saving the old-fashioned way—by spending less of their income.
The Fed frets
The lesson from recent experience in Australia, Britain and the Netherlands is that, contrary to conventional wisdom, a big rise in interest rates is not necessary to make house prices falter. This is bad news for America. Even if prices there initially just flatten rather than fall, this will hurt consumer spending as the impulse to borrow against capital gains disappears. It is by encouraging such borrowing that rising house prices have given a bigger boost to America´s economy than elsewhere. Two-fifths of all American jobs created since 2001 have been in housing-related sectors such as construction, real-estate lending and broking. If house prices actually fall, this boost will turn into a substantial drag.
No wonder that the Federal Reserve is starting, belatedly, to fret about house prices. By holding interest rates low for so long after equities crashed, the Fed helped to inflate house prices. This prevented a deep recession, but it may have merely delayed the needed economic adjustments. Ideally, the Fed should have tried to cool the housing boom by raising interest rates sooner and by giving clear verbal warnings to buyers, as Britain´s and Australia´s central banks have done. Even now some stern words from Alan Greenspan, the Fed´s chairman, could restrain more house-price inflation.
Of course, by the time American prices begin to fall, probably sometime next year, they will not be Mr Greenspan´s headache. He will have retired and someone else will be in his job. If weaker house prices push the economy towards recession, the awkward truth is that America´s policymakers will have much less room to manoeuvre than they did after the stockmarket bubble burst. Short-term interest rates of only 3% leave less scope for cuts. In 2000, America had a budget surplus. Today it has a large deficit, ruling out big tax cuts.
The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronised, and thus the effects of it will be shared widely. The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion |
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User ID: 8583
6/20/2005 2:39 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
AP
International Trade Deficit at New High
Sunday June 19, 2:27 pm ET
By Martin Crutsinger, AP Economics Writer
International Trade Deficit Rises to All-Time High of $195.1B As U.S. Sinks Deeper Into Debt
WASHINGTON (AP) -- The deficit in the broadest measure of international trade rose to an all-time high of $195.1 billion from January through March of this year as the country sank deeper into debt to Japan, China and other nations.
ADVERTISEMENT
The Commerce Department reported Friday that the deficit in the current account rose by 3.6 percent from the previous quarterly record, an imbalance of $188.4 billion in the final three months of 2004.
The current account deficit has risen to record heights in recent years as America´s demand for foreign goods and services has soared, raising worries about the country´s ability to continue financing a trade deficit at such heights.
"The seemingly insatiable U.S. demand for imports continues to drive the current account deficit higher," said Nigel Gault, U.S. economist at Global Insight. "At present, the rest of the world is happy to keep financing the deficit -- but that won´t be the case indefinitely."
In other economic news, the preliminary June reading from the University of Michigan survey of consumer sentiment showed a rebound to 94.8, the highest level since January and a sharp increase from the May reading of 86.9.
The gain in consumer confidence helped bolstered confidence on Wall Street with the Dow Jones industrial average finishing the day up 44.42 points to close at 10,623.07. The gain came in spite of another surge in oil prices with crude oil futures hitting an all-time high of $58.60 in intraday trading before settling at $58.47, up $1.89 from late Thursday.
The current account deficit for all of 2004 hit a record $668.1 billion, up a sharp 28.6 percent from the previous record of $519.7 billion in 2003.
The current account is the broadest measure of foreign trade because it covers not only trade in goods and services but also foreign aid and investment flows between nations.
The U.S. deficit must be financed by foreigners agreeing to hold more in dollar-denominated investments, something that so far they have been quite happy to do as they sell Americans more and more foreign cars, television sets and other consumer products.
However, economists worry that at some point foreigners may lose their enthusiasm for dollar-denominated investments and begin dumping their holdings in U.S. stocks and bonds. Such a development could cause interest rates in the United States to soar and push the value of the dollar and stocks down sharply. If the reaction was severe enough, it could push the country into a recession.
Critics of President Bush´s trade policies said the latest jump in the current account deficit was a further sign that American workers are not being protected from unfair foreign competition.
Sen. Byron Dorgan, D-N.D., said the current account deficit had reached "dangerously high levels" and called on the administration and Congress to change course on trade. Dorgan is leading the opposition in the Senate to approval of the administration´s Central American Free Trade Agreement.
"The administration´s trade policies have contributed to the loss of 3 million U.S. manufacturing jobs since 2000. We cannot let that continue," said Rep. Benjamin Cardin, the top Democrat on the Ways and Means trade subcommittee.
Federal Reserve Chairman Alan Greenspan has called the current account levels unsustainable but he also has said that market forces should be able to deal with the problem in a way that will not seriously disrupt the U.S. economy.
The rise in the current account deficit for the first quarter meant that the deficit now represents 6.4 percent of the total U.S. economy, also a record as a percentage of the gross domestic economy.
The deterioration in the first quarter deficit reflected an increase of $4.15 billion in the deficit in goods which rose to $186.3 billion. This was offset slightly by an increase of $1.62 billion in the surplus in services, which rose to $14.57 billion in the first quarter.
The surplus on investment flows increased by $541 million to $3.78 billion but the deficit in unilateral transfers, a category that includes foreign aid, increased by $4.70 billion to $27.07 billion. |
| FHL(C)
User ID: 12144
6/20/2005 11:28 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use
THE BOTTOM LINE
A Debt Summary
by Michael W. Hodges, Author
Grandfather Economic Report
June 19, 2005
Everyone is talking about debt these days. Perhaps more than ever before — with good cause. Huge debt levels with soaring trends can cause one to think America is becoming more addicted to debt than ever before. Like a drug junkie needing more each day, there are more and more debt junkies — in all sectors.
America used to be an economy based on production and savings, with a strong manufacturing base. Later it was said America had become what they called a ´service economy´, as manufacturing and saving ratios declined and trade deficits soared. Perhaps some will say America now has become a ´debt society´. Who knows where that leads.
TWO GREAT QUESTIONS:
1. Can the production of debt forever replace the production of goods and savings?
2. Can Americans forever borrow their way to prosperity?— forever and ever?
QUESTION > what does a summary of all debt in America look like? Answer > see below.
Knowledge is Power... provided it´s based on hard data.
Two chapters of the Grandfather Economic Report series cover Government Debt and Private Sector Debt in America - - telling the debt story by use of color data graphics:
1. Federal Government Debt Report
2. America´s Total Debt Report - includes private sector debt
Readers requested an additional web page summarizing debt in America in table form. Here it is.
BOTTOM-LINE - - DEBT SUMMARY TABLE
AMERICA´S TOTAL DEBT
- $40 Trillion -
— add another $44 trillion for contingent Social Security/Medicare —
(updated March 2005)
Our Federal Government Debt Report shows $7.6 Trillion of debt. The State & Local Government Report shows debt of $1.7 Trillion and $30.8 Trillion of private (household, business and financial sector) debt is revealed in America´s Total Debt Report.
These sum to $40.1 Trillion - - equivalent to $136,347 per capita. (This sum does not include the federal government´s un-funded contingent liabilities for social security/Medicare estimated at $44 trillion, plus additional amounts for unknown (?) contingencies listed below.)
The following table summarizes Total Debt in America - - as of January 1, 2005
TOTAL DEBT IN AMERICA
January 1, 2005
DEBT TYPE
DEBT AMOUNT
Debt Per Child
(per capita)
GOVERNMENT SECTOR DEBT:
Federal Government Sector debt - a record high
(Treasury data and Federal Government Debt Report, (includes $1.9 trillion federal govt. owes foreigners, plus $2.5 trillion debt owed U.S. domestic public, plus $3.2 trillion surplus siphoned from and owed to trust funds)
$7.6 Trillion
$25,845
State & Local Government Sector debt - a record high
(State & Local Government Spending Report)
$1.7 Trillion $ 5,699
Un-funded Social Security contingent liabilities estimated looking forward *
$7 Trillion $23,818
Un-funded Medicare contingent liabilities, estimated *
$37 Trillion $125,893
Un-funded federal employee pension and medical contingent liabilities (incl. Postal service)
?
?
Un-funded state & local government employee pension & medical contingent liabilities
?
?
Other off-budget Federal Govt. borrowings*
?
?
SUM above Government Debt
$53.3 Trillion + ?
$181,255 + ?
PRIVATE SECTOR DEBT:
(see America´s Total Debt Report)
Household Sector debt - soaring record high
$10.3 Trillion $34,923
Business Sector debt - record high
$7.8 Trillion $26,695
Financial Sector debt (domestic) - explosive record high
$12.0 Trillion $40,830
Other (extra foreign debt in addition to such included in numbers above sectors)
$0.7 Trillion $ 2,432
Un-funded business sector employee pension & medical contingent liabilities
?
?
Impact trillions of dollars of derivatives on business & financial sector debt
?
?
SUM above Private Debt
$30.8 Trillion +?
$105,003 + ?
SUM ALL DEBT
SUM Government + Private Sector Debt
(including Contingent liability items*)
$84.1 Trillion +? $286,258 +?
SUM All Government and Private Sector Debt (excluding contingent liability items*)
$40.1 Trillion $136,479
per person
? = No estimate available or there may be other contingencies
* = for discussion some of above government items see the Grandfather Social Security Report, the America´s Total Debt Report and Trust Fund Report articles. (Debt Data Sources: Federal Govt. Treasury Dept.; Private Sector and State & Local Govt. from Federal Reserve flow of funds accounts, table D.3)
Note: Although above data is exactly as published from the sources, the author believes true debt is even higher. A few examples > corporate debt is under-stated as evidenced by many companies with off-balance sheet debt (Enron, etc.) and household debt above certainly does not include many areas of non-recorded debt. I think many will agree that individuals and corporations never over-state debt— instead, many purposely under-state same.
Note: If you believe in the reliability of data reported by the federal government and the Federal Reserve Board, then you must accept the above data, because those are the data sources. If you have data and sources for the unknown (?) areas in the above table, please email M. Hodges.
Summary:
natdebt-vs-natincome.gif (6843 bytes)The above debt summary table shows — excluding contingent un-funded liabilities — total debt (private and government) is $40.1 Trillion ($9.3 trillion governments, $30.8 private sectors) — equivalent to $136,258 per person (including those in diapers), which is equivalent to $545,032 per family of 4 and $30,000 more than last year.
This chart from the chapter ´America´s Total Debt Report´ shows the trend of that $40.1 trillion debt (red line) soaring up and up much faster than the economy (blue line).
If we include several un-funded liabilities, then total debt (private plus government) is $84.1 Trillion — equivalent to $286,258 per person, which is equivalent to $1.1 million per family of 4.
Total debt of $40.1 trillion is 437% of net national income —- a record high ratio — indicating an economy more debt-dependent than ever. Each year more debt is needed to produce a dollar of national income than the prior year — a type of ´negative productivity.´
Zooming debt - - declining real savings - - soaring trade deficits > > very troubling trends !!
© 2005 Michael W. Hodges
Editorial Archive
Web note: The above editorial is a recent summary of an updated chapter from Michael Hodges series, Grandfather Economic Report. Be sure to read 2 debt chapters each with color data trend graphics to help tell the story of debt in America — since a picture is worth a thousand words:
1. Grandfather Federal Government Debt Report
2. Grandfather America´s Total Debt Report (includes private sector debt)
Michael W. Hodges
Grandfather Economic Report
Email Mr. Hodges
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| FHL(C)
User ID: 12144
6/20/2005 11:39 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use:
Foreign Investment in the US is Slowing 6/17/05
By Bud Conrad
June 17, 2005
Email Article
Printer Friendly
The US borrows almost $3B per day from foreigners to fund our Trade deficit and to support our government deficits. Since US households don´t save to provide the source of credit for our other lending, including home mortgages, it is crucial for foreigners to continue to recycle their trade surpluses back as investment in our financial assets of Treasuries, Agencies, stocks and bonds. To see in detail what is happening to the cross-border flows, I closely watch the weekly reports from the Federal Reserve on the investments made by foreigners through the Fed, and the more comprehensive monthly Treasury International Capital (TIC) System reports. There are some signs of slowing by foreigners. What follows is an update to previous articles where I explain my methodology in more detail. They can be found in the KitcoCasey.com archives.
On June 15 we got a new report from our Treasury on how much long term investment foreigners made in the US. They have slowed overall cross-border flows from a record $91 B into the US 3 months ago, to a still-large $47 B in the most recent month of April.
This morning´s quarterly Current Account was reported as a negative $195.1 B for Q1 2005. That divided by 3 is $65B per month. That is bigger than the April cross-border flow of $47 B. The chart below shows the cross border flow, its variability and lower level:
This is consistent with slowing of Custody holdings at the Fed:
Looking at just the Treasury Data, the total foreign purchases were only $14 B where they had been running $30B per month, which was the second lowest level in the last year.
No individual country purchases stood out on a monthly basis, but on the year-to-date basis, the Caribbean and London money center banks dominate purchases.
This modest slowing of supply of credit, along with the slowing of Fannie and Freddie, have been made up by expanding credit from US financial institutions of banks and Asset Backed Securities Issuers. I would think the slowing by foreigners would create more pressure for higher rates than we have seen. That the total cross-border capital inflow is below our trade deficit would be a problem if it continued for several months. The high volatility says that we would need more periods before we could be sure that this is a serious problem.
Copyright Bud Conrad, June, 2005
BudConrad@earthlink.net
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User ID: 11557
6/22/2005 3:10 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Gold at 6-Week High, Buying in Other Currencies
June 21, 2005
Bill Ridley
"Financial war is a form of nonmilitary warfare which is just as terribly destructive as bloody war, but in which no blood is actually shed... when people revise the history books... the section on financial warfare will command the reader´s utmost attention." -Unrestricted War: China´s Master Plan to Destroy America, People´s Liberation Army, Colonels Liang & Xiangsui
A few months ago in my report "China and the Final War for Resources" I pointed out that the Government of China realizes that in order for their country to grow and survive in the years ahead, they must secure resources, primarily oil supplies. They also view the United States as a major hindrance to this objective, not only because the U.S. is the world´s biggest consumer of oil but the U.S. government itself is viewed as being unpredictable, aggressive, and warlike as far as the Chinese leaders are concerned.
To win this war, the hard line doctrine taken from the treatise "Unrestricted War: China´s Master Plan to Destroy America" instructs that currency revaluation or devaluation is a primary weapon which when initiated, will create financial turbulence and economic crisis within the U.S. and thus give the Chinese the opportunity to advance their own version of national security.
In analyzing the precarious predicament that has $1.94 trillion U.S. Treasury debt owned by foreign banks, most notably China, the overloaded U. S. debt burden is already teetering on a fine line. Any hint of a problem in maintaining support of U.S. bonds would create an instantaneous meltdown of the greenback with a simultaneous surge in the price of gold.
However despite this, the Treasury Department warned China last month they have until November to make their exchange rate more flexible or they will be labeled as currency manipulators. This charge would start bilateral talks on the exchange rate and possibly retaliatory action.
Currently the yuan is pegged with the U.S. dollar at 8.3:1 giving China, with its low labor costs, an excellent trade advantage which both Republican and Democratic politicians have been strongly complaining about for the last few years.
I would have to conclude that these bureaucrats are only looking at the trade imbalance with China and ignoring the tenuous nature of the important reliance on foreign debt purchases. As Business Week warned, a revaluation of the yuan could have other serious repercussions for the dollar. "With a stronger currency peg versus the dollar, China would purchase fewer bonds, as would Asian central banks if they were to cut back on currency market intervention. And further weakness in the Treasury market with a resulting bump higher in interest rates, could weigh on the long-gestating US recovery. In that regard, US lawmakers should be very careful what they wish for."
Provoking China is a dangerous game and could have extremely serious consequences not only for the U.S. economy but the world economy. If China ever pulls the trigger on their "primary weapon" the dollar will crash and gold will break $600 in a heart beat and just keep going.
Zhu Min, general manager and advisor to the President for the Bank of China was quoted in the China Daily last year saying that: "The United States is benefiting from China using its trade surplus to buy U.S. Treasury paper as a reserve currency, along with other Asian nations. But in the long run, this is not sustainable... China will focus more and more on domestic demand, which is growing fast. Then we won´t be able to finance the U.S. deficit."
"All Beijing has to do is to mention the possibility of a sell order going down the wires. It would devastate the U.S. economy more than a nuclear strike." -Asia Times, 2004
Last year, the Wall Street Journal observed that a sell off of U.S. treasuries from a large debt holder like China would put the U.S. economy into a tail spin. Long term interest rates would climb and bond yields would sky rocket. This could start a stampede of selling which would devastate the stock market. This is the treasury trap America is in.
In May The People´s Bank of China said it would not respond to a US Treasury report calling for the central bank to move to a more flexible exchange rate within six months. A bank spokesman stated that "We have no comment whatsoever on this. We have made very clear our policies on China´s foreign exchange reform."
China´s Premier Wen Jiabao also weighed in saying China will not bow to outside pressure on the exchange rate for its currency.
All this rhetoric has gotten the attention of United Nations economists who have stated that China has an important role in the world wide economy and recovery. However in the same breath they also warned that the U.S. had better reduce its deficit or there could be serious repercussions not only in the U.S. but globally.
These thoughts have also echoed an International Monetary Fund (IMF) report that described the deficit as "perilous" in the long term and poses "significant risks" to the rest of the world. "The United States is on course to increase its net external liabilities to around 40 percent of its GDP within the next few years - an unprecedented level of external debt for a large industrial country." The bottom line of the report quite correctly forecasts this current dilemma will create a further meltdown of the dollar.
In light of the U.S. government´s huge and increasing debt load, the politician´s aggressive stance on the free trading issue of the yuan, the need of China and other foreigners to bank roll the $ 1.9 trillion of U.S. debt, warnings from the U.N. and IMF about America´s out of control spending - you must wonder what the hell these U.S. bureaucrats are thinking?
These are serious issues which I hope you, dear reader, will take to heart. A strategic analysis of your current equity portfolio would be advisable with emphasis on real assets in the form of precious metals and energy equities. No matter what happens in the future at least you will sleep and night and profits in the process.
[link to www.321gold.com] |
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6/23/2005 9:47 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
The coming trade war and global depression
By Henry C K Liu
Many historians have suggested that the 1929 stock market crash was not the cause of the Great Depression. If anything, the 1929 crash was the technical reflection of the inevitable fate of an overblown bubble economy. Yet stock market crashes can recover within a relatively short time with the help of effective government monetary measures, as demonstrated by the crashes of 1987 (23% drop, recovered in nine months), 1998 (36% drop, recovered in three months) and 2002 (37% drop, recovered in two months).
There was no quick recovery after the 1929 crash. Structurally, what made the Great Depression last for more than a decade from 1929 until the US entry into World War II in 1941 were the 1930 Smoot-Hawley tariffs, which put world trade into a tailspin from which it did not recover until the war began. While the US economy finally recovered through war mobilization after the Japanese attack on Pearl Harbor, Hawaii, on December 7, 1941, most of the world´s market economies sank deeper into war-torn distress and did not fully recover until the Korean War boom in 1951.
Barely five years into the 21st century, with a globalized neo-liberal trade regime firmly in place in a world where market economy has become the norm, trade protectionism appears to be fast re-emerging and developing into a new global trade war of complex dimensions. The irony is that this new trade war is being launched not by the poor economies that have been receiving the short end of the trade stick, but by the US, which has been winning more than it has been losing on all counts from globalized neo-liberal trade, with the European Union following suit in lockstep. Japan, of course, has never let up on protectionism and never taken competition policy seriously. The rich nations need to recognize that their efforts to squeeze every last drop of advantage out of already unfair trade will only plunge the world into deep depression. History has shown that while the poor suffer more in economic depressions, the rich, even as they are financially cushioned by their wealth, are hurt by political repercussions in the form of either war or revolution, or both.
Cold War and moral imperative
During the Cold War, there was no international free trade. The economies of the two contending ideology blocs were completely disconnected. Within each bloc, economies interacted through foreign aid and memorandum trade from their respective superpowers. The competition was not for profit but for the hearts and minds of the people in the two opposing blocs, as well as those in the non-aligned nations in the Third World. The competition between the two superpowers was to give rather than to take from their separate fraternal economies.
The population of the superpowers worked hard to help the poorer people within their separate blocs, and convergence toward equality was the policy aim even if not always the practice. The Cold War era of foreign aid and memorandum trade had a better record of poverty reduction in both camps than post-Cold War globalized neo-liberal trade dominated by one single superpower. The aim was not only to raise income and increase wealth, but also to close income and wealth disparity between and within economies. Today, income and wealth disparity is rationalized as a necessity for capital formation. The New York Times reports that from 1980 to 2002, the total income earned by the top 0.1% of earners in the United States more than doubled, while the share earned by everyone else in the top 10% rose far less and the share of the bottom 90% declined.
For all its ill effects, the Cold War achieved two formidable ends: it prevented nuclear war and it introduced development as a moral imperative into superpower geopolitical competition with rising economic equality within each bloc. In the years since the end of the Cold War, nuclear terrorism has emerged as a serious threat and domestic development is preempted by global trade, even in the rich economies, while income and wealth disparity has widened everywhere.
Since the end of the Cold War some 15 years ago, world economic growth has shifted to rely exclusively on globalized neo-liberal trade engineered and led by the US as the sole remaining superpower, financed with the US dollar as the main reserve currency for trade and anchored by the huge US consumer market made possible by the high wages of US workers. This growth has been sustained by knocking down national tariffs everywhere around the world through supranational institutions such as the World Trade Organization (WTO), and financed by a deregulated foreign-exchange market working in concert with a global central-banking regime independent of local political pressure, lorded over by the supranational Bank of International Settlement (BIS) and the International Monetary Fund (IMF).
Redefining humanist morality, the United States asserts that world trade is a moral imperative and as such trade promotes democracy, political freedom and respect for human rights in trade participating nations. Unfortunately, income and wealth equality is not among the benefits promoted by trade. Even if the validity of this twisted ideological assertion is not questioned, it clearly contradicts the US practice of trade embargo against countries Washington deems undemocratic, lacking in political freedom and deficient in respect for human rights. If trade promotes such desirable conditions, the practice of linking trade to freedom is tantamount to denying medicine to the sick.
US President George W Bush defends his free-trade agenda in moralistic terms. "Open trade is not just an economic opportunity, it is a moral imperative," he declared in a May 7, 2001, speech. "Trade creates jobs for the unemployed. When we negotiate for open markets, we´re providing new hope for the world´s poor. And when we promote open trade, we are promoting political freedom." Such claims remain highly controversial when tested by actual data.
Phyllis Schlafly, a syndicated conservative columnist, responded three weeks later in an article "Free trade is an economic issue, not a moral one". In it, she noted that while conservatives should be happy finally to have a president who added a moral dimension to his actions, "the Bible does not instruct us on free trade and it´s not one of the Ten Commandments. Jesus did not tell us to follow Him along the road to free trade ... Nor is there anything in the US constitution that requires us to support free trade and to abhor protectionism. In fact, protectionism was the economic system believed in and practiced by the framers of our constitution. Protective tariffs were the principal source of revenue for our federal government from its beginning in 1789 until the passage of the 16th Amendment, which created the federal income tax, in 1913. Were all those public officials during those hundred-plus years remiss in not adhering to a "moral obligation" of free trade?" Hardly, argued Schlafly, whose views are noteworthy because US politics is currently enmeshed in a struggle between strict-constructionist paleo-conservatives and moral-imperialist neo-conservatives. Despite the ascendance of neo-imperialism in US foreign policy, protectionism remains strong in US political culture, particularly among conservatives and in the labor movement.
Bush also said China, which reached a trade agreement with the United States at the close of the administration of his predecessor Bill Clinton, and became a member of the WTO in late 2001, would benefit from political changes as a result of liberalized trade policies. This pronouncement gives clear evidence to those in China who see foreign trade as part of an anti-China "peaceful evolution" strategy first envisaged by John Forster Dulles, US secretary of state under president Dwight Eisenhower in the 1950s. It is a strategy of inducing through peaceful trade the Chinese Communist Party (CCP) to reform itself out of power and to eliminate the dictatorship of the proletariat in favor of bourgeois liberalization. Almost four decades later, Deng Xiaoping criticized CCP chairman Hu Yaobang and premier Zhao Ziyang for having failed to contain bourgeois liberalization in their implementation of China´s modernization policy. Deng warned in November 1989, five months after the Tiananmen incident: "The Western imperialist countries are staging a third world war without guns. They want to bring about the peaceful evolution of socialist countries towards capitalism." Deng´s handling of the Tiananmen incident prevented China from going the catastrophic route of the USSR, which dissolved in 1991.
Hostility in the name of ´freedom´
Yet it is clear that political freedom is often the first casualty of a garrison-state mentality and such mentality inevitably results from hostile economic and security policy toward any country the US deems as not free. Whenever the US pronounces a nation to be not free, that nation will become less free as a result of US policy. This has been repeatedly evident in China and elsewhere in the Third World. Whenever US policy toward China turns hostile, as it currently appears to be heading, political and press freedoms inevitably face stricter curbs. For trade mutually and truly to benefit the trading economies, three conditions are necessary: 1) the de-linking of trade from ideological/political objectives, 2) maintenance of equality in the terms of trade and 3) recognition that global full employment at rising, living wages is the prerequisite for true comparative advantage in global trade.
The developing rupture between the sole superpower and its traditionally deferential allies lies in mounting trade conflicts. The United States has benefited from an international financial architecture that gives the US economy a structural monetary advantage over those of the EU and Japan, not to mention the rest of the world. Trade issues range from government-subsidy disputes between Airbus and Boeing to those regarding bananas, sugar, beef, oranges and steel, as well as disputes over fair competition associated with mergers and acquisition and financial services. If either government is found to be in breach of WTO rules when these disputes wind through long processes of judgment, the other will be authorized to retaliate. The US could put tariffs on other European goods if the WTO rules against Airbus and vice versa. So if both governments are found in breach, both could retaliate, leading to a cycle of offensive protectionism. When the US was ruled to have unfairly supported its steel industry, tariffs were slapped by the EU on Florida oranges to make a political point in a politically important state in US politics.
Trade competition between the EU and the US is spilling over into security areas, allowing economic interests to conflict with ideological sympathy. Both of these production engines, saddled with serious overcapacity, are desperately seeking new markets, which inevitably leads them to Asia in general and China in particular, with its phenomenal growth rate and its 1.2 billion eager consumers bulging with rapidly rising disposable income. The growth of the Chinese economy will lift all other economies in Asia, including Australia, which has only recently begun to understand that its future cannot be separated from its geographic location and that its prosperity is interdependent with those of other Asia-Pacific economies. Australian iron ore and beef and dairy products are destined for China, not the British Isles. The EU is eager to lift its 15-year-old arms embargo on China, much to the displeasure of the US. Israel, with its close relations with the US, faces a similar dilemma on military sales to China.
Even the US defense establishment has largely come around to the view that the US arms industry must export, even to China, to remain on top. It was reported recently that US Defense Secretary Donald Rumsfeld tried to sell to Thailand F-16 warplanes capable of firing advanced medium-range air-to-air missiles two days after he lashed out in Singapore at China for upgrading its own military when no neighboring nations are threatening it (see Rumsfeld pitches in for F-16s, June 9). The sales pitch was in competition with Russian-made Sukhoi Su-30s and Swedish JAS-39s. The open competition in arms export had been spelled out for the US Congress years earlier by Donald Hicks, a leading Pentagon technologist in the administration of president Ronald Reagan. "Globalization is not a policy option, but a fact to which policymakers must adapt," he said. "The emerging reality is that all nations´ militaries are sharing essentially the same global commercial-defense industrial base." The boots and uniforms worn by US soldiers in Afghanistan and Iraq were made in China.
The widening wealth gap
The WTO is the only global international organization dealing with the rules of trade among its 148 member nations. At its heart are the WTO agreements, known as the multilateral trading system, negotiated and signed by the majority of the world´s trading nations and ratified in their parliaments. The stated goal is to help producers of goods and services, exporters and importers conduct their business, with the dubious assumption that trade automatically brings equal benefits to all participants. The welfare of the people is viewed only as a collateral aim based on the doctrinal fantasy that "balanced" trade inevitably brings prosperity equally to all, a claim that has been contradicted by facts produced by the very terms of trade promoted by the WTO itself.
Two decades of neo-liberal globalized trade have widened income and wealth disparity within and between nations. Free trade has turned out not to be the win-win game promised by neo-liberals. It is very much a win-lose game, with heads, the rich economies win, and tails, the poor economies lose. Domestic development has been marginalized as a hapless victim of foreign trade, dependent on trade surplus for capital. Foreign trade and foreign investment have become the prerequisite engines for domestic development. This trade model condemns those economies with trade deficits to perpetual underdevelopment. Because of dollar hegemony, all foreign investment goes only to the export sector where US dollars can be earned. Even the economies with trade surpluses cannot use their dollar trade earnings for domestic development, as they are forced to hold huge dollar reserves to support the exchange rate of their currencies.
In the fifth WTO ministerial conference held in Cancun, Mexico, in September 2003, the richer countries rejected the demands of poorer nations for radical reform of agricultural subsidies that have decimated Third World agriculture. Failure to get the Doha Round back on track after the collapse of Cancun runs the danger of a global resurgence of protectionism, with the US leading the way. Larry Elliott reported on October 13, 2003, in The Guardian on the failed 2003 Cancun ministerial meeting: "The language of globalization is all about democracy, free trade and sharing the benefits of technological advance. The reality is about rule by elites, mercantilism and selfishness." Elliot noted that the process is full of paradoxes: why is it that in a world where human capital is supposed to be the new wealth of nations, labor is treated with such contempt?
Sam Mpasu, Malawi´s commerce and industry minister, asked at Cancun for his comments about the benefits of trade liberalization, replied dryly: "We have opened our economy. That´s why we are flat on our back." Mpasu´s comments summarized the wide chasm that divides the perspectives of those who write the rules of globalization and those who are powerless to resist them.
Exports of manufactures by low-wage developing countries have increased rapidly over the past three decades due in part to falling tariffs and declining transport costs that enable outsourcing based on wage arbitrage. It grew from 25% in 1965 to nearly 75% over three decades, while agriculture´s share of developing-country exports has fallen from 50% to less than 10%. Many developing countries have gained relatively little from increased manufactures trade, with most of the profit going to foreign capital. Market access for their most competitive manufactured export, such as textiles and apparel, remains highly restricted, and recent trade disputes threaten further restrictions. Still, the key cause of unemployment in all developing economies is the trade-related collapse of agriculture, exacerbated by the massive government subsidies provided to farmers in rich economies. Many poor economies are predominantly agriculturally based and a collapse of agriculture means a general collapse of the whole economy.
The Doha Development Agenda negotiations, sponsored by the WTO, collapsed in Cancun over the question of government support for agriculture in rich economies and its potential impacts on causing more poverty in developing countries. Negotiations since Cancun have focused on the need to understand better the linkages between trade policies, particularly those of the rich economies, and poverty in the developing world. While poverty reduction is now more widely accepted by establishment economists as a necessary central focus for development efforts and has become the main mission of the World Bank and other development institutions, very few effective measures have been forthcoming.
The UN Millennium Development Goals (UNMDG) commit the international community to halving world poverty by 2015, a decade from now. With current trends, that goal is likely to be achievable only through the death of half of the poor by starvation, disease and local conflicts. The UN Development Program warns that 3 million children will die in sub-Saharan Africa alone by 2015 if the world continues on its current path of failing to meet the UNMDG agreed to in 2000. Several key avenues to this goal supposedly lie in international trade, but the record of poverty reduction has been exceedingly poor, if not outright negative. The fundamental question whether trade can replace or even augment socio-economic development remains unasked, let alone answered. Until such issues are earnestly addressed, protectionism will re-emerge in the poor countries. Under such conditions, if democracy expresses the will of the people, democracy will demand protectionism more than government by elite.
While tariffs in the past decade have been coming down like leaves in autumn, flexible exchange rates have become a form of virtual countervailing tariff. In the current globalized neo-liberal trade regime operating in a deregulated global foreign-exchange market, the exchanged value of a currency is regularly used to balance trade through government intervention in currency-market fluctuations against the world´s main reserve currency - the US dollar, as the head of the international monetary snake.
Purchasing power parity (PPP) measures the disconnection between exchange rates and local prices. PPP contrasts with the interest rate parity (IRP) theory, which assumes that the actions of investors, whose transactions are recorded on the capital account, induce changes in the exchange rate. For a dollar investor to earn the same interest rate in a foreign economy with a PPP of four times, such as the purchasing power parity between the US dollar and the Chinese yuan, local wages would have to be at least four times (75%) lower than US wages. PPP theory is based on an extension and variation of the "law of one price" as applied to the aggregate economy.
The law of one price says that identical goods should sell for the same price in two separate markets when there are no transportation costs and no differential taxes applied in the two markets. But the law of one price does not apply to the price of labor. Price arbitrage is the opposite of wage arbitrage in that producers seek to make their goods in the lowest wage locations and to sell their goods in the highest price markets. This is the incentive for outsourcing, which never seeks to sell products locally at prices that reflect PPP differentials. What is not generally noticed is that price deflation in an economy increases its PPP, in that the same local currency buys more. But the cross-border one-price phenomenon applies only to certain products, such as oil, thus for a PPP of four times, a rise in oil prices will cost the Chinese economy four times the equivalent in other goods, or wages, than in the US. The larger the purchasing power parity between a local currency and the dollar, the more severe is the tyranny of dollar hegemony on forcing down wage differentials.
The origins and effects of dollar hegemony
Ever since 1971, when US president Richard Nixon, under pressure from persistent fiscal and trade deficits that drained US gold reserves, took the dollar off the gold standard (at US$35 per ounce), the dollar has been a fiat currency of a country of little fiscal or monetary discipline. The Bretton Woods Conference at the end of World War II established the dollar, a solid currency backed by gold, as a benchmark currency for financing international trade, with all other currencies pegged to it at fixed rates that changed only infrequently. The fixed-exchange-rate regime was designed to keep trading nations honest and prevent them from running perpetual trade deficits. It was not expected to dictate the living standards of trading economies, which were measured by many other factors besides exchange rates. Bretton Woods was conceived when conventional wisdom in international economics did not consider cross-border flow of funds necessary or desirable for financing world trade, precisely for this reason. Since 1971, the dollar has changed from a gold-backed currency to a global reserve monetary instrument that the US, and only the US, can produce by fiat. At the same time, the US has continued to incur both current-account and fiscal deficits.
That was the beginning of dollar hegemony. With deregulation of foreign-exchange and financial markets, many currencies began to free-float against the dollar, not in response to market forces but to maintain export competitiveness. Government interventions in foreign-exchange markets became a regular last-resort option for many trading economies for preserving their export competitiveness and for resisting the effect of dollar hegemony on domestic living standards.
World trade under dollar hegemony is a game in which the US produces paper dollars and the rest of the world produces real things that paper dollars can buy. The world´s interlinked economies no longer trade to capture comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies in foreign-exchange markets. To prevent speculative and manipulative attacks on their currencies in deregulated markets, the world´s central banks must acquire and hold dollar reserves in corresponding amounts to market pressure on their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces all central banks to acquire and hold more dollar reserves, making it stronger. This anomalous phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The denomination of oil in dollars and the recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
By definition, dollar reserves must be invested in dollar-denominated assets, creating a capital-accounts surplus for the US economy. A strong-dollar policy is in the US national interest because it keeps US inflation low through low-cost imports and it makes US assets denominated in dollars expensive for foreign investors. This arrangement, which Federal Reserve Board chairman Alan Greenspan proudly calls US financial hegemony in congressional testimony, has kept the US economy booming in the face of recurrent financial crises in the rest of the world. It has distorted globalization into a "race to the bottom" process of exploiting the lowest labor costs and the highest environmental abuse worldwide to produce items and produce for export to US markets in a quest for the almighty dollar, which has not been backed by gold since 1971, nor by economic fundamentals for more than a decade. The adverse effects of this type of globalization on the developing economies are obvious. It robs them of the meager fruits of their exports and keeps their domestic economies starved for capital, as all surplus dollars must be reinvested in US treasuries to prevent the collapse of their own domestic currencies.
The adverse effect of this type of globalization on the US economy is also becoming clear. In order to act as consumer of last resort for the whole world, the US economy has been pushed into a debt bubble that thrives on conspicuous consumption and fraudulent accounting. The unsustainable and irrational rise of US equity and real-estate prices, unsupported by revenue or profit, has meant a de facto devaluation of the dollar. Ironically, the recent fall in US equity prices from their 2004 peak and the anticipated fall in real-estate prices reflect a trend to an even stronger dollar, as the same amount of dollars can buy more deflated shares and properties. The rise in the purchasing power of the dollar inside the United States impacts its purchasing-power disparity with other currencies unevenly, causing sharp price instability in the economies with freely exchangeable currencies and fixed exchange rates, such as Hong Kong and until recently Argentina. For the US, a falling exchange rate of the dollar actually causes asset prices to rise. Thus with a debt bubble in the US economy, a strong dollar is not in the US national interest. Debt has turned US policy on the dollar on its head.
The setting of exchange values of currencies is practiced not only by sovereign governments on their own currencies as a sovereign right. The US, exploiting dollar hegemony, usurps the privilege of dictating the exchange value of all foreign currencies to support its own economic nationalism in the name of global free trade. And the US position on exchange rates has not been consistent. When the dollar was rising, as it did in the 1980s, the US, to protect its export trade, hailed the stabilizing wisdom of fixed exchange rates. When the dollar falls as it has been in recent years, the US, to deflect blame for its trade deficit, attacks fixed exchange rates as currency manipulation, as it now targets China´s currency, which has been pegged to the dollar for more than a decade. How can a nation manipulate the exchange value of its currency when it is pegged to the dollar at the same rate over long periods? Any manipulation came from the dollar, not the yuan.
Economic nationalism
The recent rise of the euro against the dollar, the first appreciation wave since its introduction on January 1, 2002, is the result of an EU version of the 1985 Plaza Accord on the Japanese yen, albeit without a formal accord. The strategic purpose is more than merely moderating the US trade deficit. The record shows that even with a 30% drop of the dollar against the euro, the US trade deficit continued to climb. The strategic purpose of driving up the euro is to reduce it to the status of the yen, as a subordinated currency to dollar hegemony. The real effect of the Plaza Accord was to shift the cost of support for the dollar-denominated US trade deficit, and the socio-economic pain associated with that support, from the United States to Japan. What is happening to the euro now is far from being the beginning of the demise of the dollar. Rather, it is the beginning of the reduction of the euro into a subservient currency to the dollar to support the US debt bubble.
Six and a half years since the launch of the European Monetary Union, the eurozone is trapped in an environment in which monetary policy of sound money has in effect become destructive and supply-side fiscal policy unsustainable. National economies are beginning to refuse to bear the pain needed for adjustment to globalization or the EU´s ambitious enlargement. The European nations are beginning to resist the US strategy to make the euro economy a captive supporter of a rising or falling dollar as such movements fit the shifting needs of US economic nationalism.
It is the modern-day monetary equivalent of the brilliant Roman strategy of making a dissident Jew a Christian god to preempt Judaism´s rising cultural domination over Roman civilization. Roman law, the foundation of the Roman Empire, gained in sophistication from being influenced by, if not directly derived from, Jewish Talmudic law, particularly on the concept of equity - an eye for an eye. The Jews had devised a legal system based on the dignity of the individual and equality before the law four centuries before Christ. There was no written Roman law until two centuries before Christ. The Roman law of obligatio was not conducive to finance as it held that all indebtedness was personal, without institutional status. A creditor could not sell a note of indebtedness to another party and a debtor did not have to pay anyone except the original creditor. Talmudic law, on the other hand, recognized impersonal credit, and a debt had to be paid to whoever presented the demand note. This was a key development of modern finance. With the Talmud, the Jews under the Diaspora had an international law that spanned three continents and many cultures.
The Romans were faced with a dilemma. Secular Jewish ideas and values were permeating Roman society, but Judaism was an exclusive religion that the Romans were not permitted to join. The Romans could not assimilate the Jews as they did the Greeks. Early Christianity also kept its exclusionary trait until Paul, who opened Christianity to all. Historian Edward Gibbon (1737-94) noted that Rome recognized the Jews as a nation who as such were entitled to religious peculiarities. The Christians, on the other hand, were a sect and, being without a nation, subverted other nations. The Roman Jews were active in government and, when not resisting Rome against social injustice, fought side by side with Roman legionnaires to preserve the empire. Roman Jews were good Roman citizens. By contrast, the early Christians were social dropouts, refused responsibility in government and civic affairs and were conscientious objectors and pacifists in a militant culture. Gibbon noted that Rome felt that the crime of a Christian was not in what he did, but in being who he was.
Christianity gained control of Roman culture and society long before Constantine, who in AD 324 sanctioned it with political legitimacy and power after recognizing its power in helping to win wars against pagans, as pope Urban II in 1095 used the Crusade to prolong papal temporal power. When early Christianity, a secular Jewish dissident sect, began to move up from the lower strata of Roman society and began to find converts in the upper echelons, the Roman polity adopted Christianity, the least objectionable of all Jewish sects, as a state religion. Gibbon estimated that Christians killed more of their own members over religious disputes in the three centuries after coming to secular power than did the Romans in three previous centuries. Persecution of the Jews began in Christianized Rome. The disdain held by early Christianity for centralized government gave rise to monasticism and contributed to the fall of the Roman Empire.
By allowing a trade surplus denominated in dollars to be accumulated by non-dollar economies such as the yen, euro, or now the Chinese yuan, the cost of supporting the appropriate value of the US dollar to sustain perpetual economic growth in the dollar economy is then shifted to these non-dollar economies, which manifest themselves in perpetual relative low wages and weak domestic consumption. For the already high-wage EU and Japan, the penalty is the reduction of social-welfare benefits and job security traditional to these economies. China, now the world´s second-largest creditor nation, it is reduced to having to ask the US, the world´s largest debtor nation, for capital denominated in dollars the US can print at will to finance its export trade to a US running recurring trade deficits.
Market impotence against trade imbalance
The IMF, which has been ferocious in imposing draconian fiscal and monetary "conditionalities" on all debtor nations everywhere in the decade after the Cold War, is nowhere to be seen on the scene in the world´s most fragrantly irresponsible debtor nation. This is because the US can print dollars at will and with immunity. The dollar is a fiat currency not backed by gold, not backed by US productivity, not backed by US export prowess, but backed by US military power. The US military budget request for Fiscal Year 2005 is $420.7 billion. For Fiscal Year 2004, it was $399.1 billion; for 2003, $396.1 billion; for 2002, $343.2 billion; and for 2001, $310 billion. In the first term of George W Bush´s presidency, the US spent $1.5 trillion on its military. That is more than the entire gross domestic product of China in 2004. The US trade deficit is about 6% of its GDP, while it military budget is about 4%. In other words, the trading partners of the US are paying for one and a half times the cost of a military that can some day be used against any one of them for any number of reasons, including trade disputes. The anti-dollar crowd has nothing to celebrate about the recurring US trade deficit.
It is pathetic that Rumsfeld tries to persuade the world that China´s military budget, which is less that one-tenth of that of the United States, is a threat to Asia, even when he is forced to acknowledge that Chinese military modernization is mostly focused on defending its coastal territories, not on force projection for distant conflicts, as is US military doctrine. While Rumsfeld urges more political freedom in China, his militant posture toward China is directly counterproductive toward that goal. Ironically, Rumsfeld chose to make his case about political freedom in Singapore, the bastion of Confucian authoritarianism.
Normally, according to free-trade theory, trade can only stay unbalanced temporarily before equilibrium is re-established or free trade would simply stop. When bilateral trade is temporarily unbalanced, it is generally because one trade partner has become temporarily uncompetitive, inefficient or unproductive. The partner with the trade deficit receives more goods and services from the partner with the trade surplus than it can offer in return and thus pays the difference with its currency that someday can buy foods produced by the deficit trade partner to re-established balance of payments. This temporary trade imbalance can be due to a number of socio-economic factors, such as terms of trade, wage levels, return on investment, regulatory regimes, shortages in labor or material or energy, trade-supporting infrastructure adequacy, purchasing power disparity, etc. A trading partner that runs a recurring trade deficit earns the reputation of being what banks call a habitual borrower, ie, a bad credit risk, one that habitually lives beyond its means. If the trade deficit is paid with its currency, a downward pressure results in the exchange rate. A flexible exchange rate seeks to remove or moderate a temporary trade imbalance while the productivity disparities between trading partners are being addressed fundamentally.
Dollar hegemony prevents US trade imbalance from returning to equilibrium through market forces. It allows a US trade deficit to persist based on monetary prowess. This translates over time into a falling exchange rate for the dollar even as dollar hegemony keeps the fall at a slow pace. But a below-par exchange rate over a long period can run the risk of turning the temporary imbalance in productivity into a permanent one. A continuously weakening currency condemns the issuing economy into a downward economic spiral. This has happened to the United States in the past decade. To make matters worse, with globalization of deregulated markets, the recurring US trade deficit is accompanied by an escalating loss of jobs in sectors sensitive to cross-border wage arbitrage, with the job-loss escalation climbing up the skill ladder. Discriminatory US immigration policies also prevent the retention of low-paying jobs within the US and exacerbate the illegal-immigration problem.
Regional wage arbitrage within the US in past decades kept its economy lean and productive internationally. Labor-intensive US industries relocated to the low-wage south of the country through regional wage arbitrage, and despite temporary adjustment pains from the loss of textile mills, the northern economies managed to upgrade their productivity, technology level, financial sophistication and output quality. The economies in the southern US also managed to upgrade these factors of production and in time managed to narrow the wage disparity within the national economy. This happened because the jobs stayed within the nation. With globalization, it is another story. Jobs are leaving the United States mercilessly. According to free-trade theory, the US trade deficit is supposed to cause the dollar to fall temporarily against the currencies of its trading partners, causing export competitiveness to rebalance, thereby removing or reducing the US trade deficit. Jobs that have been lost temporarily are then supposed to return to the US.
But the persistent US trade deficit defies trade theory because of dollar hegemony. The broad trade-weighted dollar index stays in an upward trend, despite selective appreciation of some strong currencies, as highly indebted emerging market economies attempt to extricate themselves from dollar-denominated debt through the devaluation of their currencies. While the aim is to subsidize exports, this ironically makes dollar debts more expensive in local-currency terms. The moderating impact on US price inflation also amplifies the upward trend of the trade-weighted dollar index despite persistent US expansion of monetary aggregates, also known as monetary easing or money printing.
Adjusting for this debt-driven increase in the exchange value of dollars, the import volume into the US can be estimated in relationship to expanding monetary aggregates. The annual growth of the volume of goods shipped to the United States has remained around 15% for most of the 1990s, more than five times the average annual GDP growth. The US enjoyed a booming economy when the dollar was gaining ground, and this occurred at a time when interest rates in the US were higher than those in its creditor nations. This led to the odd effect that raising interest rates actually prolonged the boom in the US rather than threatened it, because it caused massive inflows of liquidity into the US financial system, lowered import-price inflation, increased apparent productivity and prompted further spending by American consumers enriched by the wealth effect despite a slowing of wage increases. Returns on dollar assets stayed high in foreign-currency terms.
This was precisely what Greenspan did in the 1990s in the name of preemptive measures against inflation. Dollar hegemony enabled the US to print money to fight inflation, causing a debt bubble of asset appreciation. These data substantiated the view of the US as Rome in a New Roman Empire with an unending stream of imports as the free tribute from conquered lands. This was what Greenspan meant by US "financial hegemony".
The Fed Funds Rate (FFR)target has been lifted eight times in steps of 25 basis points from 1% in mid-2004 to 3% on May 3, 2005. If the same pattern of "measured pace" continues, the FFR target would be at 4.25% by the end of 2005. Despite Fed rhetoric, the lifting of dollar interest rates has more to do with preventing foreign central banks from selling dollar-denominated assets, such as US Treasuries, than with fighting inflation. In a debt-driven economy, high interest rates are themselves inflationary. Raising interest rates to fight inflation could become the monetary dog chasing its own interest-rate tail, with rising rates adding to rising inflation, which then requires more interest-rate hikes. Still, interest-rate policy is a double edged sword: it keeps funds from leaving the debt bubble, but it can also puncture the debt bubble by making the servicing of debt prohibitively expensive.
To prevent this last adverse effect, the Fed adds to the money supply, creating an unnatural condition of abundant liquidity with rising short-term interest rates, resulting in a narrowing of interest spread between short-term and long-term debts, a leading indication for inevitable recession down the road. The problem of adding to the money supply is what John Maynard Keynes called the liquidity trap, that is, an absolute preference for liquidity even at near-zero interest-rate levels. Keynes argued that either a liquidity trap or interest-insensitive investment draft could render monetary expansion ineffective in a recession. It is what is popularly called pushing on a credit string, where ample money cannot find creditworthy willing borrowers. Much of the new low-cost money tends to go to refinancing existing debt taken out at previously higher interest rates. Rising short-term interest rates, particularly at a measured pace, would not remove the liquidity trap while long-term rates stay flat because of excess liquidity.
The debt bubble in the US is clearly having problems, as evident in the bond market. With just 14 deals worth $2.9 billion, May 2005 was the slowest month for high-yield bond issuance since October 2002. The late-April downgrades of the debt of General Motors and Ford Motor to junk status roiled the bond markets. The number of high-yield, or junk-bond, deals fell 55% in the March-to-May 2005 period compared with the same three months in 2004. They were also down 45% from the December-through-February period. In dollar value, junk-bond deals totaled $17.6 billion in the March-to-May 2005 period, compared with $39.5 billion during the same three months in 2004 and $36 billion from December 2004 through February 2005. There were 407 deals of investment-grade bond underwriting during the March-to-May 2005 period, compared with 522 in the same period 2004 - a decline of 22%. In dollar volume, some $153.9 billion of high-grade bonds were underwritten from March to May 2005, compared with $165.5 billion in the same period in 2004 - a 7% decline.
Oil at $50 a barrel, along with astronomical asset-price appreciation, particularly in real estate, is giving the debt bubble additional borrowed time. But this game cannot go on forever and the end will likely be triggered by a new trade war´s effect on reduced trade volume. The price of a reduced US trade deficit is the bursting of the US debt bubble, which could plunge the world economy into a new depression. Given such options, the United States has no choice but to ride the trade-deficit train for as long as the traffic will bear, which may not be too long, particularly if protectionism begins to gather force.
The transition to offshore outsourced production has been the source of the productivity boom of the "New Economy" in the US in the past decade. The productivity increase not attributable to the importing of other nations´ productivity is much less impressive. While published government figures of the productivity index show a rise of nearly 70% since 1974, the actual rise is between zero and 10% in many sectors if the effect of imports is removed from the equation. The lower productivity values are consistent with the real-life experience of members of the blue-collar working class and the white-collar middle class who have been spending the equity cash-outs from the appreciated market value of their homes. World trade has become a network of cross-border arbitrage on differentials in labor availability, wages, interest rates, exchange rates, prices, saving rates, productive capacities, liquidity conditions and debt levels. In some of these areas, the US is becoming an underdeveloped economy.
The Bush administration continues to assure the US public that the state of the economy is sound while in reality the country has been losing entire sectors of its economy, such as manufacturing and information technology, to foreign producers, while at the same time selling off part of the nation to finance its rising and unending trade deficit. Usually, when unjustified confidence crosses over to fantasized hubris on the part of policymakers, disaster is not far ahead.
The Clinton legacy
To be fair, the problems of the US economy started before the administration of George W Bush. The Clinton administration´s annual economic report for 2000 claimed that the longest economic expansion in US history could continue "indefinitely" as long as "we stick to sound policy", according to chairman Martin Baily of the Council of Economic Advisers (CEA) as reported in the Wall Street Journal. A New York Times report differed somewhat by quoting Baily as saying: "stick to fiscal policy." Putting the two newspaper reports together, one got the sense that the Clinton administration thought its fiscal policy was the sound policy needed to put an end to the business cycle. Economics high priests in government, unlike the rest of us mortals who are unfortunate enough to have to float in the daily turbulence of the market, can afford to focus aloofly on long-term trends and their structural congruence to macro-economic theories. Yet outside of macro-economics, "long-term" is increasingly being redefined in the real world. In the technology and communication sectors, "long-term" evokes periods lasting less than five years. For hedge funds and quant shops, long-term can mean a matter of weeks.
Two factors were identified by the Clinton CEA Year 2000 economic report as contributing to the "good" news - technology-driven productivity and neo-liberal trade globalization. Even with somewhat slower productivity and spending growth, the CEA believed the economy could continue to expand perpetually. As for the huge and growing trade deficit, the CEA expected global recovery to boost demand for US exports, not withstanding the fact that most US exports are increasingly composed of imported parts.
Yet the United States has long officially pursued a strong-dollar policy that weakens world demand for US exports. The high expectation on e-commerce was a big part of optimism, which had yet to be substantiated by data. In 2000, the CEA expected the business to business (B2B) portion of e-commerce to rise to $1.3 trillion by 2003 from $43 billion in 1998. Goldman Sachs claimed in 1999 that B2B e-commerce would reach $1.5 trillion by 2004, twice the size of the combined 1998 revenues of the US auto industry and the US telecom sector. Others were more cautious. Jupiter Research projected that companies around the globe would increase their spending on B2B e-marketplaces from US$2.6 billion in 2000 to only $137.2 billion by 2005 and spending in North America alone would grow from $2.1 billion to only $80.9 billion. North American companies accounted for 81% of the total spending in 1998, but by 2005, that figure was expected to drop to 60% of the total. The fact of the matter is that Asia and Europe are now faster growth markets for communication and technology.
Reality proved disappointing. A 2004 UN Conference on Trade and Development (UNCTAD) report said that in the United States, e-commerce between enterprises, which in 2002 represented almost 93% of all e-commerce, accounted for 16.28% of all commercial transactions between enterprises. While overall transactions between enterprises (e-commerce and non e-commerce) fell in 2002, e-commerce B2B grew at an annual rate of 6.1%. As for business-to-consumer (B2C) e-commerce, UNCTAD reported that sales in the first quarter of 2004 amounted to 1.9% of total retail sales, a proportion nearly twice as large as that recorded in 2001. The annual rate of growth of retail e-commerce in the US in the year to the end of the first quarter of 2004 was 28.1%, while the growth of total retail in the same period was only 8.8%. Dow Jones reported on May 20, 2005, that first-quarter retail e-commerce sales in the US rose 23.8% compared with the year-ago period to $19.8 billion from $16 billion, according to preliminary numbers released by the Department of Commerce. E-commerce sales during the first quarter rose 6.4% from the fourth quarter, when they were $18.6 billion. Sales for all periods are on an adjusted basis, meaning the Commerce Department adjusts them for seasonal variations and holiday and trading-day differences but not for price changes.
E-commerce sales accounted for 2.2% of total retail sales in the first quarter of 2005, when those sales were an estimated $916.9 billion, according to the Commerce Department. Wal-Mart, the low-priced retailer that imports outsourced goods from overseas, grew only 2%, indicating spending fatigue on the part of low-income US consumers, while Target Stores, the upscale retailer that also imports outsourced goods, continued to grow at 7%, indicating the effects of rising income disparity.
The CEA 2000 report did not address the question of whether e-commerce was merely a shift of commerce or a real growth. The possibility exists for the new technology to generate negative growth. It happened to IBM - the increased efficiency (lower unit cost of calculation power) of IBM big frames actually reduced overall IBM sales, and most of the profit and growth in personal computers went to Microsoft, the software company that grew on business that IBM, a self-professed hardware manufacturer, did not consider worthy of keeping for itself. The same thing happened to Intel, where in 1965 company co-founder Gordon Moore observed an exponential growth in the number of transistors per integrated circuit and predicted that this trend would continue the doubling of transistors every couple of years. But what this so-called Moore´s Law did not predict was that this growth of computing power per dollar would cut into company profitability. As the market price of computer power continues to fall, the cost to producers to achieve Moore´s Law has followed the opposite trend: research and development, manufacturing, and test costs have increased steadily with each new generation of chips. As the fixed cost of semiconductor production continues to increase, manufacturers must sell larger and larger quantities of chips to remain profitable. In recent years, analysts have observed a decline in the number of "design starts" at advanced process nodes. While these observations were made in the period after the year 2000 economic downturn, the decline may be evidence that the long-term global market cannot economically sustain Moore´s Law. Is the Google bubble a replay of the AOL fiasco?
Joseph Alois Schumepter´s creative destruction theory, while revitalizing the macro-economy with technological obsolescence in the long run, leaves real corporate bodies in its path, not just obsolete theoretical concepts. Financial intermediaries and stock exchanges face challenges from electronic communication networks (ECNs), which may well turn the likes of the New York Stock Exchange (NYSE) into sunset industries. ECNs are electronic marketplaces that bring buy/sell orders together and match them in virtual space. Today, ECNs handle roughly 25% of the volume in Nasdaq stocks. The NYSE and the Archipelago Exchange (ArcaEx) announced on April 20 that they had entered a definitive merger agreement that will lead to a combined entity, NYSE Group Inc, becoming a publicly held company. If approved by regulators, NYSE members and Archipelago shareholders, the merger will represent the largest-ever among securities exchanges and combine the world´s leading equities market with the most successful totally open, fully electronic exchange. Through Archipelago, the NYSE will compete for the first time in the trading of Nasdaq -listed stocks; it will be able to indirectly capture listings business that otherwise would not qualify to list on the NYSE. Archipelago lists stocks of companies that do not meet the NYSE´s listing standards.
On fiscal policy, US government spending, including social programs and defense, declined as a share of the economy during the eight years of the Clinton watch. This in no small way contributed to a polarization of both income and wealth, with visible distortions in both the demand and supply sides of the economy. This was the opposite of the Roosevelt administration´s record of increasing income and wealth equality by policy. The wealth effect tied to bloated equity and real-estate markets could reverse suddenly and did in 2000, bailed out only by the Bush tax cut and the deficit spending on the "war on terrorism" after 2001. Private debt kept hitting all-time highs throughout the 1990s and was celebrated by neo-liberal economists as a positive factor. Household spending was heavily based on expected rising future earnings or paper profits, both of which might and did vanish on short notice. By election time in November 1999, the Clinton economic miracle was fizzling. The business cycle had not ended after all, and certainly not by self-aggrandizing government policies. It merely got postponed for a more severe crash later. The idea of ending the business cycle in a market economy was as much a fantasy as the assertion by the current vice president, Richard Cheney, in a speech before the Veterans of Foreign Wars in August 26, 2002, that "the Middle East expert Professor Fouad Ajami predicts that after liberation, the streets in Basra and Baghdad are sure to erupt in joy ..."
In their 1991 populist campaign for the White House, Bill Clinton and Al Gore repeatedly pointed out the obscenity of the top 1% of Americans owning 40% of the country´s wealth. They also said that if you eliminated home ownership and only counted businesses, factories and offices, then the top 1% owned 90% of all commercial wealth. And the top 10%, they said, owned 99%. It was a situation they pledged to change if elected. But once in office, president Clinton and vice president Gore did nothing to redistribute wealth more equally - despite the fact that their two terms in office spanned the economic joyride of the 1990s that would eventually hurt the poor much more severely than the rich. On the contrary, economic inequality only continued to grow under the Democrats. Reagan spread the national debt equally among the people while Clinton gave all the wealth to the rich.
Rising resistance to globalization
Geopolitically, trade globalization was beginning to face complex resistance worldwide by the second term of the Clinton presidency. The momentum of resistance after Clinton would either slow further globalization or force the terms of trade to be revised. The Asian financial crises of 1997 revived economic nationalism around the world against US-led neo-liberal globalization, while the North Atlantic Treaty Organization (NATO) attack on Yugoslavia in 1999 revived militarism in the EU. Market fundamentalism as espoused by the United States, far from being a valid science universally, was increasingly viewed by the rest of the world as merely US national ideology, unsupported even by US historical conditions. Just as anti-Napoleonic internationalism was in essence anti-French, anti-globalization and anti-moral-imperialism are in essence anti-US. US unilateralism and exceptionalism became the midwife for a new revival of political and economic nationalism everywhere. The Bush Doctrine of monopolistic nuclear posture, preemptive wars, "either with us or against us" extremism, and no compromise with states that allegedly support terrorism pours gasoline on the smoldering fire of defensive nationalism everywhere.
Alan Greenspan in his October 29, 1997, congressional testimony on "Turbulence in World Financial Markets" before the Joint Economic Committee said that "it is quite conceivable that a few years hence we will look back at this episode [Asian financial crisis of 1997] ... as a salutary event in terms of its implications for the macro-economy". When one is focused only on the big picture, details do not make much of a difference: the Earth always appears more or less round from space, despite that some people on it spend their whole lives starving and cities get destroyed by war or natural disasters. That is the problem with macro-economics. As Greenspan spoke, many around the world were waking up to the realization that the turbulence in their own financial markets was viewed by the US central banker as having a "salutary effect" on the US macro-economy. Greenspan gave anti-US sentiments and monetary trade protectionism held by participants in these financial markets a solid basis and they were no longer accused of being mere paranoia.
Ironically, after the end of the Cold War, market capitalism has emerged as the most fervent force for revolutionary change. Finance capitalism became inherently democratic once the bulk of capital began to come from the pension assets of workers, despite widening income and wealth disparity. The monetary value of US pension funds is more than $15 trillion, the bulk of which belongs to average workers. A new form of social capitalism emerged that would gladly eliminate the worker´s job in order to give him or her a higher return on his or her pension account. The capitalist in the individual is exploiting the worker in the same individual. A conflict of interest arises between a worker´s savings and his or her earnings. As Pogo used to say: "The enemy: they are us." This social capitalism, by favoring return on capital over compensation for labor, produces overinvestment, resulting in overcapacity. But the problem of overcapacity can only be solved by high-income consumers. Unemployment and underemployment in an economy of overcapacity decrease demand, leading to financial collapse. The world economy needs low wages the way the cattle business needs foot-and-mouth disease.
The nomenclature of neo-classical economics reflects, and in turn dictates, the warped logic of the economic system it produces. Terms such as money, capital, labor, debt, interest, profits, employment, market, etc have been conceptualized to describe synthetic components of an artificial material system created by the power politics of greed. It is the capitalist greed in the worker that causes the loss of his or her job to lower-wage earners overseas. The concept of the economic man who presumably always acts in his self-interest is a gross abstraction based on the flawed assumption of market participants acting with perfect and equal information and clear understanding of the implication of his actions. The pervasive use of these terms over time disguises the artificial system as the logical product of natural laws, rather than the conceptual components of the power politics of greed.
Just as monarchism first emerged as a progressive force against feudalism by rationalizing itself as a natural law of politics and eventually brought about its own demise by betraying its progressive mandate, social capitalism today places return on capital above not only the worker but also the welfare of the owner of capital. The class struggle has been internalized within each worker. As people facing the hard choice of survival in the present versus well-being in the future, they will always choose survival, and social capitalism will inevitably go the way of absolute monarchism, and make way for humanist socialism.
Henry C K Liu is chairman of the New York-based Liu Investment Group.
(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)
Dismal monetary science (Apr 14, ´05)
World Bank forecasts gloom
(Apr 8, ´05)
Trade war: US vs the rest of the world (Apr 2, ´05) |
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User ID: 5357
6/23/2005 9:49 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
By allowing a trade surplus denominated in dollars to be accumulated by non-dollar economies such as the yen, euro, or now the Chinese yuan, the cost of supporting the appropriate value of the US dollar to sustain perpetual economic growth in the dollar economy is then shifted to these non-dollar economies, which manifest themselves in perpetual relative low wages and weak domestic consumption. For the already high-wage EU and Japan, the penalty is the reduction of social-welfare benefits and job security traditional to these economies. China, now the world´s second-largest creditor nation, it is reduced to having to ask the US, the world´s largest debtor nation, for capital denominated in dollars the US can print at will to finance its export trade to a US running recurring trade deficits.
Market impotence against trade imbalance
The IMF, which has been ferocious in imposing draconian fiscal and monetary "conditionalities" on all debtor nations everywhere in the decade after the Cold War, is nowhere to be seen on the scene in the world´s most fragrantly irresponsible debtor nation. This is because the US can print dollars at will and with immunity. The dollar is a fiat currency not backed by gold, not backed by US productivity, not backed by US export prowess, but backed by US military power. The US military budget request for Fiscal Year 2005 is $420.7 billion. For Fiscal Year 2004, it was $399.1 billion; for 2003, $396.1 billion; for 2002, $343.2 billion; and for 2001, $310 billion. In the first term of George W Bush´s presidency, the US spent $1.5 trillion on its military. That is more than the entire gross domestic product of China in 2004. The US trade deficit is about 6% of its GDP, while it military budget is about 4%. In other words, the trading partners of the US are paying for one and a half times the cost of a military that can some day be used against any one of them for any number of reasons, including trade disputes. The anti-dollar crowd has nothing to celebrate about the recurring US trade deficit.
It is pathetic that Rumsfeld tries to persuade the world that China´s military budget, which is less that one-tenth of that of the United States, is a threat to Asia, even when he is forced to acknowledge that Chinese military modernization is mostly focused on defending its coastal territories, not on force projection for distant conflicts, as is US military doctrine. While Rumsfeld urges more political freedom in China, his militant posture toward China is directly counterproductive toward that goal. Ironically, Rumsfeld chose to make his case about political freedom in Singapore, the bastion of Confucian authoritarianism.
Normally, according to free-trade theory, trade can only stay unbalanced temporarily before equilibrium is re-established or free trade would simply stop. When bilateral trade is temporarily unbalanced, it is generally because one trade partner has become temporarily uncompetitive, inefficient or unproductive. The partner with the trade deficit receives more goods and services from the partner with the trade surplus than it can offer in return and thus pays the difference with its currency that someday can buy foods produced by the deficit trade partner to re-established balance of payments. This temporary trade imbalance can be due to a number of socio-economic factors, such as terms of trade, wage levels, return on investment, regulatory regimes, shortages in labor or material or energy, trade-supporting infrastructure adequacy, purchasing power disparity, etc. A trading partner that runs a recurring trade deficit earns the reputation of being what banks call a habitual borrower, ie, a bad credit risk, one that habitually lives beyond its means. If the trade deficit is paid with its currency, a downward pressure results in the exchange rate. A flexible exchange rate seeks to remove or moderate a temporary trade imbalance while the productivity disparities between trading partners are being addressed fundamentally.
Dollar hegemony prevents US trade imbalance from returning to equilibrium through market forces. It allows a US trade deficit to persist based on monetary prowess. This translates over time into a falling exchange rate for the dollar even as dollar hegemony keeps the fall at a slow pace. But a below-par exchange rate over a long period can run the risk of turning the temporary imbalance in productivity into a permanent one. A continuously weakening currency condemns the issuing economy into a downward economic spiral. This has happened to the United States in the past decade. To make matters worse, with globalization of deregulated markets, the recurring US trade deficit is accompanied by an escalating loss of jobs in sectors sensitive to cross-border wage arbitrage, with the job-loss escalation climbing up the skill ladder. Discriminatory US immigration policies also prevent the retention of low-paying jobs within the US and exacerbate the illegal-immigration problem.
Regional wage arbitrage within the US in past decades kept its economy lean and productive internationally. Labor-intensive US industries relocated to the low-wage south of the country through regional wage arbitrage, and despite temporary adjustment pains from the loss of textile mills, the northern economies managed to upgrade their productivity, technology level, financial sophistication and output quality. The economies in the southern US also managed to upgrade these factors of production and in time managed to narrow the wage disparity within the national economy. This happened because the jobs stayed within the nation. With globalization, it is another story. Jobs are leaving the United States mercilessly. According to free-trade theory, the US trade deficit is supposed to cause the dollar to fall temporarily against the currencies of its trading partners, causing export competitiveness to rebalance, thereby removing or reducing the US trade deficit. Jobs that have been lost temporarily are then supposed to return to the US.
But the persistent US trade deficit defies trade theory because of dollar hegemony. The broad trade-weighted dollar index stays in an upward trend, despite selective appreciation of some strong currencies, as highly indebted emerging market economies attempt to extricate themselves from dollar-denominated debt through the devaluation of their currencies. While the aim is to subsidize exports, this ironically makes dollar debts more expensive in local-currency terms. The moderating impact on US price inflation also amplifies the upward trend of the trade-weighted dollar index despite persistent US expansion of monetary aggregates, also known as monetary easing or money printing.
Adjusting for this debt-driven increase in the exchange value of dollars, the import volume into the US can be estimated in relationship to expanding monetary aggregates. The annual growth of the volume of goods shipped to the United States has remained around 15% for most of the 1990s, more than five times the average annual GDP growth. The US enjoyed a booming economy when the dollar was gaining ground, and this occurred at a time when interest rates in the US were higher than those in its creditor nations. This led to the odd effect that raising interest rates actually prolonged the boom in the US rather than threatened it, because it caused massive inflows of liquidity into the US financial system, lowered import-price inflation, increased apparent productivity and prompted further spending by American consumers enriched by the wealth effect despite a slowing of wage increases. Returns on dollar assets stayed high in foreign-currency terms.
This was precisely what Greenspan did in the 1990s in the name of preemptive measures against inflation. Dollar hegemony enabled the US to print money to fight inflation, causing a debt bubble of asset appreciation. These data substantiated the view of the US as Rome in a New Roman Empire with an unending stream of imports as the free tribute from conquered lands. This was what Greenspan meant by US "financial hegemony".
The Fed Funds Rate (FFR)target has been lifted eight times in steps of 25 basis points from 1% in mid-2004 to 3% on May 3, 2005. If the same pattern of "measured pace" continues, the FFR target would be at 4.25% by the end of 2005. Despite Fed rhetoric, the lifting of dollar interest rates has more to do with preventing foreign central banks from selling dollar-denominated assets, such as US Treasuries, than with fighting inflation. In a debt-driven economy, high interest rates are themselves inflationary. Raising interest rates to fight inflation could become the monetary dog chasing its own interest-rate tail, with rising rates adding to rising inflation, which then requires more interest-rate hikes. Still, interest-rate policy is a double edged sword: it keeps funds from leaving the debt bubble, but it can also puncture the debt bubble by making the servicing of debt prohibitively expensive.
To prevent this last adverse effect, the Fed adds to the money supply, creating an unnatural condition of abundant liquidity with rising short-term interest rates, resulting in a narrowing of interest spread between short-term and long-term debts, a leading indication for inevitable recession down the road. The problem of adding to the money supply is what John Maynard Keynes called the liquidity trap, that is, an absolute preference for liquidity even at near-zero interest-rate levels. Keynes argued that either a liquidity trap or interest-insensitive investment draft could render monetary expansion ineffective in a recession. It is what is popularly called pushing on a credit string, where ample money cannot find creditworthy willing borrowers. Much of the new low-cost money tends to go to refinancing existing debt taken out at previously higher interest rates. Rising short-term interest rates, particularly at a measured pace, would not remove the liquidity trap while long-term rates stay flat because of excess liquidity.
The debt bubble in the US is clearly having problems, as evident in the bond market. With just 14 deals worth $2.9 billion, May 2005 was the slowest month for high-yield bond issuance since October 2002. The late-April downgrades of the debt of General Motors and Ford Motor to junk status roiled the bond markets. The number of high-yield, or junk-bond, deals fell 55% in the March-to-May 2005 period compared with the same three months in 2004. They were also down 45% from the December-through-February period. In dollar value, junk-bond deals totaled $17.6 billion in the March-to-May 2005 period, compared with $39.5 billion during the same three months in 2004 and $36 billion from December 2004 through February 2005. There were 407 deals of investment-grade bond underwriting during the March-to-May 2005 period, compared with 522 in the same period 2004 - a decline of 22%. In dollar volume, some $153.9 billion of high-grade bonds were underwritten from March to May 2005, compared with $165.5 billion in the same period in 2004 - a 7% decline.
Oil at $50 a barrel, along with astronomical asset-price appreciation, particularly in real estate, is giving the debt bubble additional borrowed time. But this game cannot go on forever and the end will likely be triggered by a new trade war´s effect on reduced trade volume. The price of a reduced US trade deficit is the bursting of the US debt bubble, which could plunge the world economy into a new depression. Given such options, the United States has no choice but to ride the trade-deficit train for as long as the traffic will bear, which may not be too long, particularly if protectionism begins to gather force.
The transition to offshore outsourced production has been the source of the productivity boom of the "New Economy" in the US in the past decade. The productivity increase not attributable to the importing of other nations´ productivity is much less impressive. While published government figures of the productivity index show a rise of nearly 70% since 1974, the actual rise is between zero and 10% in many sectors if the effect of imports is removed from the equation. The lower productivity values are consistent with the real-life experience of members of the blue-collar working class and the white-collar middle class who have been spending the equity cash-outs from the appreciated market value of their homes. World trade has become a network of cross-border arbitrage on differentials in labor availability, wages, interest rates, exchange rates, prices, saving rates, productive capacities, liquidity conditions and debt levels. In some of these areas, the US is becoming an underdeveloped economy.
The Bush administration continues to assure the US public that the state of the economy is sound while in reality the country has been losing entire sectors of its economy, such as manufacturing and information technology, to foreign producers, while at the same time selling off part of the nation to finance its rising and unending trade deficit. Usually, when unjustified confidence crosses over to fantasized hubris on the part of policymakers, disaster is not far ahead.
The Clinton legacy
To be fair, the problems of the US economy started before the administration of George W Bush. The Clinton administration´s annual economic report for 2000 claimed that the longest economic expansion in US history could continue "indefinitely" as long as "we stick to sound policy", according to chairman Martin Baily of the Council of Economic Advisers (CEA) as reported in the Wall Street Journal. A New York Times report differed somewhat by quoting Baily as saying: "stick to fiscal policy." Putting the two newspaper reports together, one got the sense that the Clinton administration thought its fiscal policy was the sound policy needed to put an end to the business cycle. Economics high priests in government, unlike the rest of us mortals who are unfortunate enough to have to float in the daily turbulence of the market, can afford to focus aloofly on long-term trends and their structural congruence to macro-economic theories. Yet outside of macro-economics, "long-term" is increasingly being redefined in the real world. In the technology and communication sectors, "long-term" evokes periods lasting less than five years. For hedge funds and quant shops, long-term can mean a matter of weeks.
Two factors were identified by the Clinton CEA Year 2000 economic report as contributing to the "good" news - technology-driven productivity and neo-liberal trade globalization. Even with somewhat slower productivity and spending growth, the CEA believed the economy could continue to expand perpetually. As for the huge and growing trade deficit, the CEA expected global recovery to boost demand for US exports, not withstanding the fact that most US exports are increasingly composed of imported parts.
Yet the United States has long officially pursued a strong-dollar policy that weakens world demand for US exports. The high expectation on e-commerce was a big part of optimism, which had yet to be substantiated by data. In 2000, the CEA expected the business to business (B2B) portion of e-commerce to rise to $1.3 trillion by 2003 from $43 billion in 1998. Goldman Sachs claimed in 1999 that B2B e-commerce would reach $1.5 trillion by 2004, twice the size of the combined 1998 revenues of the US auto industry and the US telecom sector. Others were more cautious. Jupiter Research projected that companies around the globe would increase their spending on B2B e-marketplaces from US$2.6 billion in 2000 to only $137.2 billion by 2005 and spending in North America alone would grow from $2.1 billion to only $80.9 billion. North American companies accounted for 81% of the total spending in 1998, but by 2005, that figure was expected to drop to 60% of the total. The fact of the matter is that Asia and Europe are now faster growth markets for communication and technology.
Reality proved disappointing. A 2004 UN Conference on Trade and Development (UNCTAD) report said that in the United States, e-commerce between enterprises, which in 2002 represented almost 93% of all e-commerce, accounted for 16.28% of all commercial transactions between enterprises. While overall transactions between enterprises (e-commerce and non e-commerce) fell in 2002, e-commerce B2B grew at an annual rate of 6.1%. As for business-to-consumer (B2C) e-commerce, UNCTAD reported that sales in the first quarter of 2004 amounted to 1.9% of total retail sales, a proportion nearly twice as large as that recorded in 2001. The annual rate of growth of retail e-commerce in the US in the year to the end of the first quarter of 2004 was 28.1%, while the growth of total retail in the same period was only 8.8%. Dow Jones reported on May 20, 2005, that first-quarter retail e-commerce sales in the US rose 23.8% compared with the year-ago period to $19.8 billion from $16 billion, according to preliminary numbers released by the Department of Commerce. E-commerce sales during the first quarter rose 6.4% from the fourth quarter, when they were $18.6 billion. Sales for all periods are on an adjusted basis, meaning the Commerce Department adjusts them for seasonal variations and holiday and trading-day differences but not for price changes.
E-commerce sales accounted for 2.2% of total retail sales in the first quarter of 2005, when those sales were an estimated $916.9 billion, according to the Commerce Department. Wal-Mart, the low-priced retailer that imports outsourced goods from overseas, grew only 2%, indicating spending fatigue on the part of low-income US consumers, while Target Stores, the upscale retailer that also imports outsourced goods, continued to grow at 7%, indicating the effects of rising income disparity.
The CEA 2000 report did not address the question of whether e-commerce was merely a shift of commerce or a real growth. The possibility exists for the new technology to generate negative growth. It happened to IBM - the increased efficiency (lower unit cost of calculation power) of IBM big frames actually reduced overall IBM sales, and most of the profit and growth in personal computers went to Microsoft, the software company that grew on business that IBM, a self-professed hardware manufacturer, did not consider worthy of keeping for itself. The same thing happened to Intel, where in 1965 company co-founder Gordon Moore observed an exponential growth in the number of transistors per integrated circuit and predicted that this trend would continue the doubling of transistors every couple of years. But what this so-called Moore´s Law did not predict was that this growth of computing power per dollar would cut into company profitability. As the market price of computer power continues to fall, the cost to producers to achieve Moore´s Law has followed the opposite trend: research and development, manufacturing, and test costs have increased steadily with each new generation of chips. As the fixed cost of semiconductor production continues to increase, manufacturers must sell larger and larger quantities of chips to remain profitable. In recent years, analysts have observed a decline in the number of "design starts" at advanced process nodes. While these observations were made in the period after the year 2000 economic downturn, the decline may be evidence that the long-term global market cannot economically sustain Moore´s Law. Is the Google bubble a replay of the AOL fiasco?
Joseph Alois Schumepter´s creative destruction theory, while revitalizing the macro-economy with technological obsolescence in the long run, leaves real corporate bodies in its path, not just obsolete theoretical concepts. Financial intermediaries and stock exchanges face challenges from electronic communication networks (ECNs), which may well turn the likes of the New York Stock Exchange (NYSE) into sunset industries. ECNs are electronic marketplaces that bring buy/sell orders together and match them in virtual space. Today, ECNs handle roughly 25% of the volume in Nasdaq stocks. The NYSE and the Archipelago Exchange (ArcaEx) announced on April 20 that they had entered a definitive merger agreement that will lead to a combined entity, NYSE Group Inc, becoming a publicly held company. If approved by regulators, NYSE members and Archipelago shareholders, the merger will represent the largest-ever among securities exchanges and combine the world´s leading equities market with the most successful totally open, fully electronic exchange. Through Archipelago, the NYSE will compete for the first time in the trading of Nasdaq -listed stocks; it will be able to indirectly capture listings business that otherwise would not qualify to list on the NYSE. Archipelago lists stocks of companies that do not meet the NYSE´s listing standards.
On fiscal policy, US government spending, including social programs and defense, declined as a share of the economy during the eight years of the Clinton watch. This in no small way contributed to a polarization of both income and wealth, with visible distortions in both the demand and supply sides of the economy. This was the opposite of the Roosevelt administration´s record of increasing income and wealth equality by policy. The wealth effect tied to bloated equity and real-estate markets could reverse suddenly and did in 2000, bailed out only by the Bush tax cut and the deficit spending on the "war on terrorism" after 2001. Private debt kept hitting all-time highs throughout the 1990s and was celebrated by neo-liberal economists as a positive factor. Household spending was heavily based on expected rising future earnings or paper profits, both of which might and did vanish on short notice. By election time in November 1999, the Clinton economic miracle was fizzling. The business cycle had not ended after all, and certainly not by self-aggrandizing government policies. It merely got postponed for a more severe crash later. The idea of ending the business cycle in a market economy was as much a fantasy as the assertion by the current vice president, Richard Cheney, in a speech before the Veterans of Foreign Wars in August 26, 2002, that "the Middle East expert Professor Fouad Ajami predicts that after liberation, the streets in Basra and Baghdad are sure to erupt in joy ..."
In their 1991 populist campaign for the White House, Bill Clinton and Al Gore repeatedly pointed out the obscenity of the top 1% of Americans owning 40% of the country´s wealth. They also said that if you eliminated home ownership and only counted businesses, factories and offices, then the top 1% owned 90% of all commercial wealth. And the top 10%, they said, owned 99%. It was a situation they pledged to change if elected. But once in office, president Clinton and vice president Gore did nothing to redistribute wealth more equally - despite the fact that their two terms in office spanned the economic joyride of the 1990s that would eventually hurt the poor much more severely than the rich. On the contrary, economic inequality only continued to grow under the Democrats. Reagan spread the national debt equally among the people while Clinton gave all the wealth to the rich.
Rising resistance to globalization
Geopolitically, trade globalization was beginning to face complex resistance worldwide by the second term of the Clinton presidency. The momentum of resistance after Clinton would either slow further globalization or force the terms of trade to be revised. The Asian financial crises of 1997 revived economic nationalism around the world against US-led neo-liberal globalization, while the North Atlantic Treaty Organization (NATO) attack on Yugoslavia in 1999 revived militarism in the EU. Market fundamentalism as espoused by the United States, far from being a valid science universally, was increasingly viewed by the rest of the world as merely US national ideology, unsupported even by US historical conditions. Just as anti-Napoleonic internationalism was in essence anti-French, anti-globalization and anti-moral-imperialism are in essence anti-US. US unilateralism and exceptionalism became the midwife for a new revival of political and economic nationalism everywhere. The Bush Doctrine of monopolistic nuclear posture, preemptive wars, "either with us or against us" extremism, and no compromise with states that allegedly support terrorism pours gasoline on the smoldering fire of defensive nationalism everywhere.
Alan Greenspan in his October 29, 1997, congressional testimony on "Turbulence in World Financial Markets" before the Joint Economic Committee said that "it is quite conceivable that a few years hence we will look back at this episode [Asian financial crisis of 1997] ... as a salutary event in terms of its implications for the macro-economy". When one is focused only on the big picture, details do not make much of a difference: the Earth always appears more or less round from space, despite that some people on it spend their whole lives starving and cities get destroyed by war or natural disasters. That is the problem with macro-economics. As Greenspan spoke, many around the world were waking up to the realization that the turbulence in their own financial markets was viewed by the US central banker as having a "salutary effect" on the US macro-economy. Greenspan gave anti-US sentiments and monetary trade protectionism held by participants in these financial markets a solid basis and they were no longer accused of being mere paranoia.
Ironically, after the end of the Cold War, market capitalism has emerged as the most fervent force for revolutionary change. Finance capitalism became inherently democratic once the bulk of capital began to come from the pension assets of workers, despite widening income and wealth disparity. The monetary value of US pension funds is more than $15 trillion, the bulk of which belongs to average workers. A new form of social capitalism emerged that would gladly eliminate the worker´s job in order to give him or her a higher return on his or her pension account. The capitalist in the individual is exploiting the worker in the same individual. A conflict of interest arises between a worker´s savings and his or her earnings. As Pogo used to say: "The enemy: they are us." This social capitalism, by favoring return on capital over compensation for labor, produces overinvestment, resulting in overcapacity. But the problem of overcapacity can only be solved by high-income consumers. Unemployment and underemployment in an economy of overcapacity decrease demand, leading to financial collapse. The world economy needs low wages the way the cattle business needs foot-and-mouth disease.
The nomenclature of neo-classical economics reflects, and in turn dictates, the warped logic of the economic system it produces. Terms such as money, capital, labor, debt, interest, profits, employment, market, etc have been conceptualized to describe synthetic components of an artificial material system created by the power politics of greed. It is the capitalist greed in the worker that causes the loss of his or her job to lower-wage earners overseas. The concept of the economic man who presumably always acts in his self-interest is a gross abstraction based on the flawed assumption of market participants acting with perfect and equal information and clear understanding of the implication of his actions. The pervasive use of these terms over time disguises the artificial system as the logical product of natural laws, rather than the conceptual components of the power politics of greed.
Just as monarchism first emerged as a progressive force against feudalism by rationalizing itself as a natural law of politics and eventually brought about its own demise by betraying its progressive mandate, social capitalism today places return on capital above not only the worker but also the welfare of the owner of capital. The class struggle has been internalized within each worker. As people facing the hard choice of survival in the present versus well-being in the future, they will always choose survival, and social capitalism will inevitably go the way of absolute monarchism, and make way for humanist socialism.
Henry C K Liu is chairman of the New York-based Liu Investment Group. |
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User ID: 16598
7/1/2005 2:55 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
China: U.S. Dollar may not be Worth the Paper it is Printed on
Axel Merk, June 28th 2005
The $18.5 billion bid by China´s state-controlled Cnooc Ltd. to purchase the American energy company Unocal has created fear, anger and calls for intervention among U.S. politicians. As the U.S. trade deficit, currently around 6% of Gross Domestic Product (GDP), continues to climb, China has access to vast amounts of U.S. dollars that it has hoarded over the years. Until recently, Chinas has simply been buying U.S. Treasuries. In recent months, it has become clear that China is becoming a more active investor, showing interest in natural resources (timber, oil and gas assets) and U.S. enterprises (IBM´s personal computer business and Maytag, among others).
China, already the world´s largest importer of many raw materials, anticipates dramatically higher energy and natural resource requirements in the years ahead. The world´s oil production capacity, according to some estimates, is approaching its peak and there will be increased global competition for natural resources. While China is securing capacity, the United States has not built additional oil refineries since the 1970s (nor have any nuclear reactors been built since).
In the meantime, the U.S. is consuming goods imported from China at a record pace. Because of the tremendous trade deficit, the Chinese are sitting on hundreds of billions of U.S. dollars. Now, as the Chinese want to use this money wisely, U.S. politicians cry foul. The Chinese must wonder whether the U.S. dollar is worth the paper it is printed on. It is acceptable to use dollars to buy consumer goods, but if they are put to use to invest in the future, red lights go off in Washington.
Warren Buffett has long argued that the U.S. trade deficit is akin to selling out U.S. assets to foreigners. His once abstract warnings are now becoming vividly clear: With a huge trade deficit, foreigners are going to own ever larger chunks of U.S. assets. And unlike Americans, who seem to derive great satisfaction from consuming goods frequently with a nearly insatiable appetite, the Chinese are investing in their energy needs of the future.
That is not to say that the Cnooc bid and others from China are not shocking. The culprit, however, is not the Chinese government, but the U.S. fiscal and monetary policies that foster an environment of exploding trade imbalances and abysmal domestic savings. We believe this policy puts long-term pressure on the dollar, especially as Asian countries realize that their dollar reserves will not be honored if they are used for something of value to them.
As far as this particular transaction is concerned, Cnooc is only interested in the Asian assets of Unocal and will spin-off the U.S. assets. U.S. calls to intervene are unlikely to be successful as it is difficult to argue that U.S. "national interests" are being jeopardized the way this offer is structured. What bugs many is that Cnooc is 70% state controlled and has access to financing at below market rate interest rates. According to Chevron, also interested in acquiring Unocal, this is unfair state intervention.
Politicians will fight over this transaction in the coming weeks and may be able to force China to open up their markets further, so that foreigners can take control of more Chinese owned firms. But much of the discussion will miss the point: China, having become a major player in the global market with deep pockets, will want to put its dollars to use. The Chinese have subsidized their currency to sell cheap goods to the U.S. In return, they have accumulated billions of dollars. Now they will find out whether these dollars are worth anything at all as they try to use them to secure their future natural resource needs. If disappointed, China and other Asian countries may accelerate their diversification out of the U.S. dollar and into a basket of hard currencies. |
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User ID: 16941
7/4/2005 11:56 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Heading for the "Puke Point"
June 29, 2005
Richard Daughty
321 Gold
I am in full lock-down mode here at the Mogambo Bunker, and I gotta tell ya that I look pretty sharp in my camouflage Speedo and these bandoliers of ammo across my chest. The reason that I am so frantic is that the growth in Total Fed Credit has gone to zero for over a month now. This is, for me, the ultimate in bad news.
The lack of growth in Fed Credit is bad news because, as Peter Zihlmann of P. Zihlmann Investments explains, "The present expansion is the longest running expansion on record. It has surpassed all other economic expansions before it. The driving force behind it is the rapid growth of the money supply and the explosion of credit that has accompanied it." Many people are saying that the money supply is anemic, too, but that is not exactly true. In fact, M3 has accelerated over the last month above its trend for the last few years, although the monetary base has pretty much leveled off.
But if there really is no rapid growth in the money supply, and there is no explosion in new credit, then the longest-running expansion in history must be just that; history.
Gary Lammert, who is a practitioner of fractal analysis, writes that even when there is money and credit being pumped out, there is nothing to guarantee that they money will be spent on anything useful. "But without the growing money supply flowing into investments for the production of real and useful items that can be sold in a competitive manner to the global markets, the generated economic activity may be malinvested into cul de sacs of domestic services, speculative financial assets, and purely domestic production items such as housing construction."
So the money may be thrown down some rat hole or another, such as stocks or bonds or houses.
"Every great economic cycle," he goes on to say, "has a recognizable -usually in retrospective- apogee inflection point or day where markets peak and begin their primary descent. While the primary cause of this inflection point in major economic cycles is a decelerating rate of growth money supply (prior to an actual contracting money supply), the inciting composite elements of that decelerating money supply are a combination of fundamental evolving feedback conditions occurring in the real economy at the consumer level. At the consumer level - ongoing wages, consumer debt load, forward consumption status, and projected job status dependent on near term production needs - all factor into the deceleration of borrowing and hence money supply." In short, sometimes people are already so far in debt that they don´t want to take on any more damn debt and then have to listen to their wives or husbands whining and complaining that they can´t afford to eat as it is, and borrowing MORE damn money to buy ANOTHER damn machinegun is crazy. Some people have called this the "puke point."
And if that wasn´t enough, in the last week foreigners have suddenly stopped buying our debt through their accounts at the Fed. And the banks have suddenly divested themselves of $74 billion in government debt. In one week! One! And the banks got rid of another $11.5 billion in "other securities," to boot!
The only bright spot, if you want to call it that, is that mortgage activity in the banks took a big jump, as usual, meaning that the only thing that is selling well is the ultimate in humongously-expensive, time-consuming, non-productive things, namely houses.
Now, left to its own devices, the economy would, under normal circumstances, drift into a little recession, the excesses would be cleaned out, and the stupid businesses (the only kind that will hire me) would all go under, and the mismanaged businesses would all go under, freeing up resources of all kinds, and the busted people who acted like idiots would all be swearing that if they ever, EVER, get their hands on another dime, they will never, never, EVER act so stupid with it again as long as they lived, cross my heart And, for awhile, people will try and save some money and make do without things they want, and savings would grow, and pent-up demand would grow, and then one day, for reasons that nobody can actually enumerate, things get a little better, and then they get a little more better, and then better and better and better, and after awhile the economy is perking again, only slightly different, since there are no stupid businesses or mismanaged business stinking up the joint.
But these are not normal times. The cover of Barron´s this week, with the headline "When Will He Stop?" should convince you of that. The illustration is of Alan Greenspan pumping up a balloon with a bicycle pump. The balloon, emblazoned with "4%", is leaking air. The article, inside, by Randall W. Forsyth, who is one of the Assistant Managing Editors of Barron´s, wrote the cover story. He entitled it, "Leaky Balloon" with the subhead, "Greenspan´s end game". The story itself is nothing, as the whole purpose of that particular newspaper is to get people to buy stocks, and it would irritate advertisers to even suggest that everything was not wonderful, or even hint that today is not the perfect time to buy stocks, and lots of them. So it is not surprising that it does not even mention the cause of our problems; an out-of-control Federal Reserve and the resultant enormous levels of staggering, stultifying, smothering debt in every freaking corner of the world. So how insightful can it be?
But the article does contain a helpful suggestion as to where the next stimulus is going to be. He quotes Independent Strategy, a London based consultancy, as saying "there is a paucity of corporate spending the U.S. and the rest of the developed world."
If this is true, and even if it is not true, then you can count on Congress to pass some more tax incentives to encourage businesses to spend. And since mere deductions, which only means that the business does not have to pay tax on the money they spent, are insufficient, look for tax credits, where the business gets actual cash from the government! Spend a buck, get some, if not all, of your money back! Talk about an economic stimulus!
Perhaps this explains an article in the Washington Post, entitled "The Road to Riches Is Called K Street," informs us that the number of registered lobbyists in Washington, D.C. has, since 2000, more than doubled. The fees they charge their clients have doubled.
Why this sudden lobbying activity? The Post explains "The lobbying boom has been caused by three factors, experts say: rapid growth in government, Republican control of both the White House and Congress, and wide acceptance among corporations that they need to hire professional lobbyists to secure their share of federal benefits."
Patrick J. Griffin, who is identified as "President Bill Clinton´s top lobbyist", says that the clients of lobbyists "see that they can win things, that there´s something to be gained." It´s this next part that caused me to spew beer out of my nose. "Washington has become a profit center." Like this is news or something! Hahahaha!
But it IS news, because of the sudden sheer size of the money involved, as the article then went on to chronicle how the Republicans have sold out, becoming as loathsome as the Democrats, only better dressed, when they write "The Republicans in charge aren´t just pro-business, they are also pro-government. Federal outlays increased nearly 30 percent from 2000 to 2004, to $2.29 trillion. And despite the budget deficit, federal spending is set to increase again this year, especially in programs that are prime lobbying targets, such as defense, homeland security, and medical coverage." In short, things to kill people, things to spy on people, and socialized medicine. Terrific. Just freaking terrific.
Having said that, this is where I always make my big mistake, as I always underestimate the lengths to which government will go, and the depths to which they will sink, to desperately try and ameliorate the damage that they continuously do. So I, foolishly trying in vain to learn from my mistakes, now say that you should look for more tax rebates, something on the order of a thousand bucks to everybody! Look for tax credits for buying cars and houses! Look for taxpayer money being spent to pay poor people´s down payments on houses! Look for elimination of capital gains on investments! Look for spending on energy development of all kinds! Drilling for oil! Solar! Wind power! Hydrogen power! Nuclear power! Biomass! Natural gas! Anything, Jack, anything!
And this is entirely possible, because when you have a fiat currency, there is no end to what a government can do to literally put money into people´s pockets. It is limited only to the extent of the human imagination, greed and fear.
And since the entire economy is now totally dependent on the four-legged stool of government spending, the stock market, the bond market, and the housing market, that is where the Congressional stimulus will probably flow.
Of course, all of this stimulus spending will not be good news for inflation, which is already bad and getting worse. The good news is that I do not even have to do any real work, as Doug Noland has already done the math. "For the week," he writes, "the CRB index rose 0.4%, increasing y-t-d gains to 10.0%. The Goldman Sachs Commodities index added 0.3%, with 2005 gains rising to 27.9%." And for a personal opinion, go buy something. The prices will astound you.
Or, even easier and a lot cheaper, I can tell you what you will find, courtesy of an article in the June 19 issue of my stupid hometown Leftist rag of a newspaper, the St. Petersburg Times. They have, across the bottom of the page, some charts. Since 1998, median home prices are up 13.9% per year, gas prices up 13.1% per year, homeowners insurance up9.9% per year, health insurance up 14.5% per year. On the income side, average wages are up 3.3% per year, and Social Security payments are up 3.6% per year.
The article itself is an entire page of the stories of people who can no longer actually survive, thanks to prices rising so much.
If you read between the lines of Larry Edelson´s "Real Wealth Report", you will note that he agrees with The Mogambo about this inflation thing. But if you call him up to ask him about this, he acts all surprised and says "Mogambo who?"
But this is not about how Mr. Edelson snubs the poor Mogambo, who is merely trying to borrow a few bucks to get him through the week. No, he is talking about inflation, and he writes, "And right now, almost every commodity and investment I write about - food, precious metals, energy, even water - is soaring. The cost of a 5-ounce can of pistachios I bought yesterday is up 12% in a month. A large size bag of Lay´s potato chips is up another 14%. Corn and wheat prices are up 13% and 11% respectively since early May. Soybean prices are on a tear, UP 23% in barely four weeks. The price of cocoa is up 10% in a week. Sugar is up 10% in three weeks. A loaf of bread is up 8.9% since the first of the year. A head of lettuce is up 13%."
And it is going to get worse and worse because, as he correctly says, "Rising oil prices are inflationary." To amend that, I will generalize to say that rising prices of ANY kind is inflationary.
The famous Jim Rogers is on the same wavelength, and he figures that, just looking at historical precedents, "The boom market in commodities will last till sometime between 2014 and 2022. The crude oil crisis however, could deepen unless someone discovers a huge, new oilfield." Yeah, like THAT´S going to happen ! Hahahaha! There has not been one major oil field find, anywhere in the world, in the last 35 years!
But your government is doing all it can to shield you from the bad news, even as it works overtime to make it worse. They are lying about prices, as Mr. Edelson notes when he says "the Consumer Price Index is essentially a sham. It´s manipulated lower because it´s the index the government uses to adjust Social Security, welfare, and Medicare payments. The lower the index - or the slower its rise - the more the government saves.
"No taxes of any kind are accounted for as a cost of living. Not personal taxes. Not sales and local taxes. Not consumption taxes. Not even property taxes. For some reason, the government does not consider these items to be ´a cost of living.´
"But the biggest manipulation in the CPI is the way the government calculates the cost of housing. It uses rents as a substitute for the actual cost of buying a home. But with millions of Americans dumping their rentals and rushing into home ownership, rents are actually going down in some areas."
That is why I have not run into anybody, anywhere, who thinks that inflation is not roaring, or anybody who is not angry about it, and when I tell them that the government says that inflation is very, very, very low, they look at me incredulously and ask "What are you? Some kind of idiot?" and I have to admit that, yes, I am an idiot, but that does not change the fact that the government is lying when it says that inflation is, as I reported, very, very, very low.
I am surprised at the hostile reaction to the Supreme Court ruling in Kelo v. New London. The crux of the case is, using their analogy, that the state can take property from A to give it to B because B will pay higher taxes. The people don´t like that? Hahahaha! I shake my head in wonder! This is the exact same loathsome Leftist lunatic philosophy that has permeated everything for the last half century! But now, NOW, they are upset? The government is continually taking something away from you, whom I will refer to as A, to give it to some other guy, whom I will label as B. But now, just because it is their houses on the line, people are getting upset? Hahahaha! What morons!
But you never hear WHY New London is making this grab for people´s property. The reason is, obviously that the morons of New London, like moronic governments everywhere, have persisted in electing Leftist morons to their government, and that government of morons (GOM) has spent the last half century spending every dime they can get their hands on, and raising taxes to get MORE money to spend, and promising the moon to everybody. Now they need money. They need lots of money. Lots and lots of money. But taxes are already so onerous that they can´t raise them any more.
And why do they need so much money? They have provided for legions of city workers who are, like all government workers everywhere, grossly overpaid and under-worked, and who have benefit packages so outrageously generous that they are not even available anywhere in the private sector, and they are under-funded. They have promised lifetime pensions to everybody that ever sat on the City Council, or worked for the government, or even merely walked by City Hall one day when they were handing out generous pensions to everybody in sight. They have continuously built parks and playgrounds and recreational facilities and gymnasiums and nature trails and museums and swimming pools and erected a multitude of public buildings, and staffed all of them to the max. They have responded to the egregiously bad performance of their educational system by paying the bad teachers and administrators more and more and more, instead of firing them. They have created local entitlement programs and welfare programs and before-school breakfast programs and after-school latch-key programs and school-crossing guard programs and assistance programs of every stripe. They have whole fleets of new cars and trucks for city employees. They have issued general obligation bonds and revenue-anticipation bonds by the truck full. And now they have, like the butthead citizens who elected these dimwits, spent their way to the literal edge of bankruptcy.
And so the people are upset? Hahahaha! The state has debased and destroyed their money, but they are not upset about that. The state has grown itself to be, literally, half the entire economy, but they are not upset about that. The state has now installed so many taxes on so many things that they have driven up prices, but they are not upset about that. The state has indebted every citizen alive, and citizens who are not even born yet, so heavily that the debt cannot ever be paid back, but they are not upset about that. The state has encouraged that all the retirement accounts of everyone be put into the stock and bond markets, and they have lost money for years, but they are not upset about that. The state has gradually eaten away at every liberty, piece by piece by piece, but they are not upset about that. They have allowed the Constitution to be gutted, bit by bit by bit, but they are not upset about that. But maybe force them to move out of their houses, and they are, all of a sudden, upset about that! Hahahaha!
Perhaps Vox Day, in an essay on WorldNetDaily.com, encapsulated it best when he wrote, "Merely substitute a few terms in describing the system and it becomes clear that the Supreme Court has established a neofeudal oligarchy, where all land is held in the name of the federal government-king, governed by his local government-nobles and worked by taxpayer-serfs. Should one serf fail to produce a satisfactory harvest of crops-tax revenues, the noble can take the land from one serf and give it to another who promises to produce a more abundant harvest.
"This is a major expansion of the eminent domain concept, and I can confidently predict that the redefinition of the constitutional term ´public use´ will soon be as stretched beyond recognition as the now-meaningless phrase ´interstate commerce,´ (as has) the Orwellian term that now covers things that do not cross state lines (and thus are not interstate) and have not been sold or exchanged for other goods (and thus are not commerce)."
China reportedly has 50 coal-fired plants under construction, and there are another 600 or so planned for the next 6 to 8 years. That´s a good thing, too, as they are going to need every kilowatt, because the future of China is that there are going to be more, a lot more, gigawatt-gobbling air conditioners and furnaces and hot water heaters and dishwashers and computers and printers and TVs and VCRs and video games and electric gizmos of all kinds, and lots and lots of power-hungry machinery and industrial processes to supply all of this stuff. Investment tip o´ the day: invest in coal and coal-oriented technologies.
But, predictably, air pollution is bad and getting worse. As a result, the National People´s Congress Standing Committee passed a Renewable Energy Law, effective January 1, 2006. This new law requires that by 2020, 10 percent of China´s electricity must be generated from renewable energy sources by 2020.
Ten percent of the usage today is a hell of a lot. Okay, now let´s look at fifteen years of growth in electricity usage, given the extent of planned increase in coal-fired technology alone talked about in the preceding paragraph. Wow!
And let´s not forget about oil, as they are going to use a lot of oil.
I was given a copy of the famous June 5 NY Times article about gold by Stephen Metcalf entitled "Believing in Bullion" which was okay as far as it went. But the part that really started me going berserk is that he is quoting some bozo German sociologist named Georg Simmel, whom Mr. Metcalf characterizes as "the greatest theorist of money" who said that "money is only money when it is in motion." The actual quote from this Simmel jerk is "When money stands still, it is no longer money according to its specific value and significance." Hahaha! What a moron! This proves that he does not understand the first thing about money, just as I do not understand the first thing about being a good husband and father. And as for the suggestion that he is the "greatest theorist of money" I laugh one of those long and labored Mogambo laughs (LALML) that convey contempt and ridicule, hahahahahahahahahahahaha!
So, to paraphrase this Simmel bonehead, food is not food until you eat it? Gasoline is not gasoline until you drive your car? A hand grenade is not an explosive until you pull the pin? The Mogambo is not an idiot until he opens his mouth to speak? Ha!
If you run into this Simmel character, probably unemployed and passed out drunk on a sidewalk somewhere is this is an example of his intellectual powers, let him know that money is also supposed to be a store of value, too, and as such, it is still money when it is sitting in your wallet. In fact, I say, and you can quote me, "Money is worth more than almost anything you can buy with it."
Bill Murphy of Letropolecafe.com says that the heyday of gold is looming. "Wait until the facts surface about how the central banks squandered 2/3 of all their bank reserves to foster a price manipulation scheme. There will be a frenzy to own the stuff like never seen before." How big a frenzy? He opines that "we will most likely see the gold price somewhere between $3,000 and $5,000 US an ounce", which is, admittedly, what a lot of other people have said, too, but I just like hearing it.
But maybe not today, as I notice that the gold lease rates are again at very low levels, which means that the central banks and bullion banks are trying as hard as they can to get as much gold into the market as they can to make the price of gold stay as low as they can, so that people will not say "Look at the soaring price of gold! The Mogambo was right! We´re all freaking doomed!" And, of course, there are always the insiders at the COMEX, fraudulently manipulating the price of gold and silver to enrich themselves. Will it work again this time, or have the people of the world finally gotten sophisticated enough that they can recognize that when the price of gold gets pushed down like this, it now always bounces back? Have they gotten wise to the fact that a dollar that is going down in price guarantees a rising price for precious metals, and that these temporary lower prices are actually a genuine bargain situation? If they are smart, they do. If they are not smart, then they won´t.
But Americans are not very smart, and if you think that America´s young people are going to lead the world in literacy skills and education so that they can make the big money and pay the enormous taxes that will be necessary, think again. Stateline.org reports that up to 30% of students fail to finish high school to get diploma. Thirty freaking percent! "Broken down by race, nearly half of Hispanic, African-American and Native American students who start secondary school never receive a diploma." Half! Half of the fastest-growing sub-populations in the USA can´t even get through high school!
But there is some good news, although it will surely be fleeting and, being a coward and crybaby, requires a level of courage that I cannot even imagine. As reported on FreeMarketNews.com, "A federal jury found former IRS Criminal Investigative Division (CID) Special Agent and CPA Joseph Banister not guilty of all counts alleging criminal tax fraud and conspiracy related to actions he took on behalf of a California business owner who had openly defied the IRS over several years by stopping withholding of all income and employment taxes from the paychecks of his workers."
The fabulous news is that, at the root, Mr. Banister was able to prove that people since the Constitution prohibits an income tax, people have to obligation to pay income taxes, as there is no Constitutional amendment authorizing one. The 16th Amendment, which authorizes an income tax, has been around, of course, but apparently no state has actually ratified the damn thing, and so an income tax is illegal! This must be news to the Cato Institute, as their booklet, "The Declaration of Independence and the Constitution of the United States of America" has a footnote that says "The Sixteenth Amendment was ratified February 3, 1913."
If your local newspaper is Leftist trash, like mine, then this will be a surprise to you, too, as there is no mention of this miraculous, earth-shaking verdict. But I figure that the word will get around. Then I figure that Bush will sign an Executive Order to make it mandatory, thus amending the Constitution by Presidential fiat, which is, paradoxically, also prohibited by the Constitution. But don´t look to the corrupt Supreme Court to protect your silly butt about such niceties as upholding the Constitution, as we have discovered to our continual dismay.
David Morgan, writing in The Morgan Report, cites a Forbes magazine chart showing that the average price of silver over 600 years, as expressed in 1998 dollars, has been $150 per ounce. And those 1998 dollars are now seven years older and about 30% more devalued. So the real, inflation-adjusted price of silver must be about $200 an ounce now. But silver is selling for only seven bucks and change! What a bargain!
The Daily Reckoning site frequently uses the term "lumpinvestoriat", which is a real catchy word, to characterize idiots who happily part with their money without thinking about what in the hell they are doing, mostly by investing in something about which they know nothing about, and who generally pay for their folly. Clever reader Carol F. has coined the term "jumpinvestoriat", which she defines as "those who simply jump into supposedly ´hot´ investments without much thought."
Kurt Richebacher notes that Japan is still suffering, 15 years later, from their own lumpinvestoriat and jumpinvestoriat real estate frenzy. He writes, "it is mainly bad loans on real estate that have paralyzed Japan´s banking system. America´s commercial banks, not to mention its numerous subprime lenders, are doing their best to beat the follies of their Japanese brethren." And the Japanese went crazy, too, as, according to Puru Saxena, "At the peak of the bubble in 1990, Japanese real-estate was worth four times the value of all property in the US!"
And since real estate markets in The United Kingdom, Ireland, New Zealand, the Netherlands have all started collapsing, it is time to brush off that old adage, "What goes around comes around". And that means bad news for the USA in the next year or so. Mogambo housing tip o´ the day (MHTOTD), rent, don´t buy.
Roger Reynolds, of "Shame on you, Federal Reserve!" fame, says "Pull up stockcharts.com. Type in $indu:$xoi. Be sure to put the colon in. This shows a ratio of the market divided by oil stocks. It´s in a big downtrend!!! This means that the market strength is almost entirely in oil/gas/service stocks. Remember, there are a large number of energy stocks many with big shares outstanding. It also means that the broad market has been in a downtrend for many months."
The heroic government effort to privatize Social Security has cooled recently, but you can be sure that it will eventually pass. Being The Mogambo, I will take a moment away from serenely sniffing lotus blossoms and contemplating the existential cosmos to tell you what will almost certainly happen. Payroll taxes will be increased by a percent or two, up from the current 15.3%. You will be given the chance to either "invest" this increase in your new private account, or let the government have it. Simple and elegant, with both the financial services industry and the government rolling in more money. And you rolling in less money.
Peter Schiff of Euro Pacific Capital is watching the clueless halfwits that comprise our Congress getting all bent out of shape with China, and is laughing that these losers want the Treasury secretary and Alan Greenspan, of all people, to "do something" about how China is "unfair". He writes "The scene is straight out of Alice in Wonderland. It is hard to fathom how these Congressmen could be so clueless as to the extent that China subsidizes the U.S. economy, and directly finances the very budget deficits these spendthrifts so irresponsibly vote to produce."
But it gets worse, as he notes by writing "In fact, short of a formal declaration of war, the single most damaging thing that China could do to America is exactly what our politicians are demanding. What is even more ironic, is that giving in to these demands is also the best thing China could do to improve the lives of its own citizens." So, in short, China is being very, very nice to us, at the expense of its own citizens, as a stronger yuan would allow them to import things at lower prices. And yet this is not enough for Congress in general and that that arch-moron, John Kerry, in particular. And it still burns my smelly butt that the idiotic Democrats nominated this loser to be President of the United States! Grrrr.
But this is not about John Kerry, whom I despise, or the voters of Massachusetts, whom I also despise for constantly sending the horrid Ted Kennedy and this clueless bozo to Congress year after year, or even about Democrats, whom I consider to be the lowest form of life on the planet, as evidenced by the childish, ridiculous, low-IQ, touchy-feely, moronic, big-heart-but-small-brains, bankrupting things they say and do. No, this is about money, and Mr. Schiff is also speaking of money when he writes, "This year alone America´s current account deficit is likely to be $800 billion. To put this number in its proper perspective, $800 billion is equal to the combined market capitalization of the following fifteen Dow Jones companies: Alcoa, American Express, Boeing, Caterpillar, Coca-Cola, DuPont, General Motors, Hewlett-Packard, Home Depot, Honeywell, 3M, McDonalds, Merck, SBC Communications, and Walt Disney. In other words, to finance just one year´s purchases of consumer electronics, granite counter-tops, vacations, automobiles, furniture, appliances, clothing, toys, and net interest and dividend payments, Americans will basically give away the equivalent of half of the companies that comprise the Dow Jones Industrial Average." Half! For one year´s worth of imports! One!
John Mackenzie of the M2 newsletter reports that the "Organization for Economic Cooperation and Development (OECD), the representative body of the richest 26 countries in the world, announced that it is sharply reducing its forecasts for every leading economy."
In addition, "The OECD forecast the U.S. Current Account Deficit would continue to rise, reaching ~ $900 billion, closing in on 7% of United States GDP, in 2006." As if taking a cue from the essential Mogambo (TES), he cannot simply report, but he feels compelled to add a snide and contemptuous editorial comment. "In other words," he writes "the mountainous DEBT will continue to be piled higher and higher until it collapses in a dung heap that topples the 26 leading economies and everyone else as well."
In keeping with this dour outlook, he predicts that "2005 will be a continual decline, while 2006 will mark the awareness of the ´Greatest Depression.´ Please protect yourself; this is going to be horrific as we move forward." I couldn´t have said it better myself, especially the part about how it will be "The Greatest Depression."
The Bank for International settlements, known popularly as the BIS, has a new report out that says "Despite a roughly 60 percent rise in oil prices this year," the BIS "doubted stagflation would return", which shows how much smarter the BIS is than the rest of us dumb weenies out here, namely me, who are not only predicting that very thing, but are also saying that when an economy is growing less than the rate of inflation, as we are now, then that IS stagflation.
But blithely ignoring The Mogambo standing outside their precious little BIS windows in their precious little BIS building chanting "Stagflation! Staglflation!", they go on to say, and this is really funny, "Central banks are unlikely to make the same mistakes so that history can repeat itself." Hahahaha! Show me a central bank that is NOT making the same mistakes over and over and over again!
The reason they say this is that "central banks today focus foremost on price stability and react quickly to inflation risks, making mistakes less likely." Hahaha!
The Bank of England is shocked and aghast at the sudden rise in bankruptcies, and they are taking steps, so they say, to tighten lending standards to try and prevent more of them! Hahaha! Too late! At this stage of the game, or at any stage of any game, the only thing that the stupidity known as modern mainstream economics prescribes is more credit, not less! Hahaha!
The soothing and hollow words of the Bank of England notwithstanding, central banks always create more and more money and credit to keep the over-indebted economy from collapsing. As Peter Warburton wrote (thanks Jeff W!), "the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur." But people everywhere have so much debt now that they cannot keep paying it, and so they go bankrupt. And yet, the exact theoretical idiocy that the central banks of the world, and especially our own despicable Federal Reserve, recommends is to supply MORE credit!
Ugh.
*****The Mogambo Sez: Things are coming to a head, and so it is naturally time for the government to cook up some Big Event that will transfix our attention away from our own pitiful condition. War with Iran seems to be it. I´m as aghast as you are.
[link to www.321gold.com] |
| Monique
User ID: 454
7/5/2005 12:01 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
First posted 1/7/2005. Not for worry, correction come some day ;) |
| .
User ID: 16941
7/5/2005 12:28 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Financial Terrorism
by Dan Denning
July 5, 2005
The Daily Reckoning PRESENTS: Of all the geopolitical events looming on the horizon for America, the largest one is the potential for conflict with Iran - which would certainly cause a major change in the world economy. Dan Denning offers his advice for investors who are willing to prepare for the unexpected...
[This essay was adapted from Dan´s new book: The Bull Hunter]
Contrary to what you see in the press, though, the average Frenchman or woman is not that different from you, except, perhaps, at the dinner table. The French take their food seriously. A cup of coffee or a three hour dinner is not just about the quality of the food or the wine. Eating is a social experience in France. What´s more, serving food is a serious profession for which men and women go to school in France.
That may seem silly to Americans. But you can see why a Frenchman who deals with food professionally chafes at being bossed around by Americans who deal with food recreationally. For the French, food is serious pleasure, to be relished and treated with respect. For Americans, food is serious business, to be consumed and treated with salt.
Americans want prompt service, healthy portions, and plenty of attention for an extra fork, some more napkins, or another Coke. The French want to be left alone to eat, talk, and digest. I am convinced that much of the animosity between America and France stems from the difference in the way we treat food. A lot would be resolved if both nations treated food the way the English do, namely as something to be deep-fried, eaten, and tolerated between cups of coffee or pints of lager.
This culinary side trip has served a purpose, I hope. When you visit foreign countries, it takes you out of your comfort zone. Other people have different customs. The food is different. Often the language is different. Making yourself uncomfortable causes you to see things you wouldn´t otherwise see. It changes your perspective. It´s also a way of showing yourself that what once seemed too challenging to attempt is actually not as hard as it looks. But what does it mean to make yourself uncomfortable as investors? There are three answers to this question.
First, it means being bold enough to think unconventionally. This, of course, is the whole bull hunter philosophy. You recognize that the world is always changing and that what worked yesterday may not work tomorrow. You are willing to try new approaches to achieve your investment goals.
Second, it means using all the tools at your disposal. This can sometimes be even more difficult than allowing yourself to think differently. Most of us are lazy. We´d do as little as possible to achieve our investment goals, if we could get away with it. But these days, doing as little as possible is the same thing as doing nothing at all.
Finally, you have to be willing to ask the questions no one else wants to ask. In the investment world, thinking about the future can be a dangerous game. You can´t predict the future. If you invest your money based on faulty predictions, you could easily lose it. Yet the investor´s greatest challenge is to figure out what price to pay today for future earnings that are unpredictable. The further you go into the future, the harder it is to tell what tomorrow will bring and what you should be willing to pay for it today.
But the stock market looks ahead, not behind. And so we have to look ahead, too, to try to see what´s coming, if not in the earnings picture, then at least in the bigger picture. You´re going to be investing in a stock market driven by geopolitical events as much as earnings, probably for the rest of your investment life. That means trying to decipher what events like war in the Middle East or high personal debt levels in America might mean for the stock market.
It´s also possible to look into the future and make some intelligent speculations on what might happen. Using options on index funds and exchange-traded funds is one way that modern investors can insure themselves against large, macroeconomic risks. It is not foolproof insurance. And it is not without risk. But in a dangerous and uncomfortable world, it is one practical way to begin putting the tools at your disposal to work.
In a speech I gave in Chicago in 2004, I made the case for $100-a barrel oil to 150 options investors. They were shocked, skeptical, and intrigued, by turns. I told them that event-driven investment moves - the kind where an external event shocks markets and causes a big move up or down in a sector or the whole market - are nearly impossible to predict. But strategic foresight can help you prepare for some of them.
One of the largest geopolitical events looming on the horizon today is a potential conflict with Iran. Iran is a charter member of President George W. Bush´s Axis of Evil. Iran is near the top of the president´s foreign policy agenda for his second term. At stake is whether Iran will become a nuclear power. It´s not clear how this would change the world. What is clear is that the mullahs who run Iran have a strategic vision of their own. To investors, what ought to be even clearer is what the consequences of a war with Iran would mean: $100 oil.
Any economist worth his or her pocket protector will tell you that $100 oil is not economically sustainable. The world simply could not afford to pay $100 for a barrel of oil - for a sustained period of time. It would create a world of oil haves and have-nots, and might even precipitate oil wars between nations desperately competing over a scarce and expensive natural resource. Not only would it drive U.S. gasoline prices to unimaginable heights, the shock of such a dramatic rise in energy costs would throw the world´s economy into a deep and painful recession, if not a depression. But that doesn´t mean it couldn´t happen anyway - at least for a few days or weeks.
You don´t have to be Dr. Strangelove to envision what the Iranian strategy might be against the U.S. economy. I say economy and not military. The nature of an Iranian counterattack would mostly likely be to strike against U.S. economic interests. And what greater interest than oil? After all, it´s much easier to drive the price of oil to $100 a barrel and instigate a political firestorm in Washington, D.C., than it is to defend against American strategic bombers and precision-guided munitions. Iran knows that America and all of Europe and Japan are addicted to oil.
Much of that oil comes from the Persian Gulf and must physically pass through the Strait of Hormuz to get to its final destinations. By choking off the supply of oil at this strategic point, Iran could exert enormous pressure on the United States, which would itself be pressured by those who desperately count on Middle East oil and want no part of America´s quarrel with Iran.
With such a potentially high economic price to pay for a war with Iran, I´ve been told by some strategic investors that the United States would never risk it. But here is a question to make you uncomfortable: If it is plain for all to see that the way to America´s weakness is through interrupting the flow of oil from the Persian Gulf, isn´t it just a matter of time until someone tries it? Instead of fighting a war conventionally, why not try economic warfare, attacking what makes a country strong to begin with - its economy?
In total economic warfare, you attack a country´s access to natural resources or its currency. By attacking its economy, you indirectly weaken its ability to attack you militarily.
If not Iran, then perhaps al Qaeda? And if not at the Strait of Hormuz, then perhaps at the Saudi oil refinery of Ras Tanura, one of the world´s biggest and most productive? Even the British Broadcasting Corporation (BBC) sees what could happen. In 2004, the BBC aired a docudrama about what´s been called an "energy Pearl Harbor."
Here´s how it works (in the mind of the BBC). A rogue Middle Eastern oil trader works for a major money-center bank. Working in concert with his terrorist conspirators in Saudi Arabia, the trader takes an enormous leveraged position short crude oil, much as a hedge fund or institution might. At the same time, al Qaeda terrorists target the Saudi oil facility of Ras Tanura, the largest oil complex in the world. Ras Tanura cranks out almost 4.5 million barrels per day. Former CIA agent Robert Baer wrote in his book Sleeping With the Devil (Crown, 2003) that an attack like the one on the U.S.S. Cole in 2000 could knock out Ras Tanura for weeks. Baer also speculates that if the oil processing facility of Abqaiq were attacked via a hijacked jetliner, it would reduce Saudi production by as much as 4 million barrels per day for up to seven months.
You get the picture. The trader takes a huge position short. The oil price spikes on the terror attack. The leveraged short position becomes a form of financial terrorism. The banks´ losses mount to the stratosphere. They hit their capital reserve requirements. They must liquidate others´ assets. They are forced to sell, causing a wave of selling by other financial institutions.
The BBC presentation of the story morphed into the trader´s "real" motives. He was upset with his bosses´ focus on profits and turned out not to be in collaboration with al Qaeda. It´s all fiction anyway. But if you were looking for a way to put Western economies in checkmate, sending the oil price sky-high and precipitating a financial crisis at the same time, it´s hard to think of a better way - if you practiced total economic warfare, that is.
Regards,
Dan Denning
for The Daily Reckoning
Editor´s Note: Dan Denning, editor of Strategic Investments, is one of America´s most respected "big picture" analysts working today. The above essay was adapted from his new book, The Bull Hunter.
In The Bull Hunter, Dan lays out all the details of how to profit in ways most investors never imagined just five years ago. What´s more, he´ll show you why it´s never been more dangerous to put all your investment eggs in the basket of the U.S. economy. It´s a timely warning, along with an exceptional opportunity. |
| .
User ID: 16941
7/5/2005 12:58 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
SHOCK CHART!
We have just posted two astounding charts on the www.peoplenomics.com site that demand further public awareness: Program Trading on the NYSE for the week June 20-24 is reported as 76.3% of all trading volume! A program trade is defined by the NYSE as "Program trading is defined as a wide range of portfolio trading strategies involving the purchase or sale of 15 or more stocks having a total market value of $1 million or more." As we see if, if you buy or sell on the NYSE, your odds are about three out of four that you will be buying or selling to a machine program!
At the same time program trading has been soaring as a percent of exchange "handle" the public is again heading for the exits:
We´ll let you figure out for yourself what declining public "handle" in the markets means -
our take on it is as an extremely pessimistic sign of what´s to come this fall.
"$100 Oil by Winter"
Not to say "we told you so" but there´s a report this weekend in the British papers forecasting $100 oil by this winter, quoting no less than former Cheney energy advisor Matt Simmons. You know what this will do to prices of food, transportation, and will impact the economy in general, right?
Is Rove the Plame Traitor?
We have conflicted reports on this starting with the report that Lawrence O´Donnell named Bush advisor Karl Rove as the source of the leak in the Valerie Plame/CIA agent name leak case on Friday night. On the other hand, a lawyer for Rove says it was not his client... This should boil over early next week.
Just in From Iraq
Our wandering correspondent on military affairs has just checked in today (Sunday Iraq time) and offers this update:
"GEORGE:
It´s tough to get news back to you when we are this far out. A great deal of thanks goes to an unlikely source, the fine folks who rep PBS in the US. True they know my politics stand just to the right of Attila the Hun, but they help get word back to you just the same.
Just for the record, the much publicized "Raid on the Insurgents" that supposedly took place just before King George´s address to the American sheep was nothing more than a division size patrol. Nothing more than smoke and mirrors.
Second, the report you got from the White House, that although new troops are joining the insurgents, the numbers remain about the same is BS. This place is filling up with the faithful.
Wandering Texan on the ground in Iraq
News from Elliott Wave International
Saying Now What We Couldn´t Say Then.... 7/1/2005 4:14:13 PM " Earlier this week (June 28) I mentioned that silver has been one of the most markets of the past two years. Today´s price action made silver more interesting still, because it allows me to say something now that I couldn´t say a couple of days ago....Read More How To Trade with Waves & 0.618 6/28/2005 4:27:36 PM " One example of the use of the Fibonacci ratio in the Elliott Wave Principle is to establish targets based upon common relationships among waves. Read More
Still Trading ´the News´? 6/29/2005 6:00:54 PM " Two economic reports were released today -- one good, one bad -- which, if you´re a forex trader, could make you think twice next time you try to trade on ´economic news...´Read More Silver, Unfolding at FOUR Degrees of Trend 7/1/2005 4:06:46 PM " Silver´s dramatic 2.5% plunge Friday was just the latest turn in a plot so full of twists it would make Alfred Hitchcock proud. Yet if you go beyond glances and fast impressions, this price action is anything but arbitrary. Silver is moving in a series of recognizable Elliott waves. The pattern couldn´t be more pronounced, and is in the very early stages of unfolding at four degrees of trend....~Read More
If You Knew in 2002 What Oil Would Do... 6/17/2005 5:03:04 PM " Do you think GM would be in such dire straits today, if management had known where the price of oil and gas were headed?Read More ´Drawing the Unimaginable´ 6/29/2005 5:51:33 PM " You may remember our story from about six months ago about a scandalous new adaptation of the classic fairy tale Hansel and Gretel that opened in Germany. Now, two new comic books just released in Germany -- comics that deal not with the usual make-believe world of mad scientists, inept policemen and superheroes in grotesque outfits, but with a ´very real horror -- the Holocaust.´ What does this say about Germany´s social mood? Read on...Read More
FIVE YEARS AGO you would have known that oil prices would be setting records now. read more.
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George Ure, The People´s Economist
Bulldog Editions In the glory days of newspapering, the Bull Dog edition was the Sunday edition of the paper issued on Saturday morning. It had all the regular features, but might not have the absolutely most current up to the minute "headline" items. We´ve generalized that, such that when we issue something in advance of our regular Monday morning update, we call them "Bull dog editions." Whenever you see a BULL DOG notice on the top of this page, check back later for a more recent update. Bulletins are posted as our work schedule permits and as events warrant. We try to publish Mon-Fri by 6:30 AM Pacific (9:30 Eastern. Sometimes we don´t awaken on time, but when delays are expected we try to publish a projected update time for your convenience. |
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User ID: 17166
7/6/2005 4:21 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Arlene (5 July 2005)
"THE COMING ECONOMIC COLLAPSE"
--------------------------------------------------------------------------------
Hello my dear brother John, and all of you precious Doves.....
THE COMING ECONOMIC COLLAPSE
See url below.
The coming collapse of the global economy is surely one of the major factors causing the "distress of nations", leading up to and including the coming judgment years........so bad, people will call for a "leader"...just like after the German monetary inflation / collapse, and they called for a "leader"...they got one...amen?
Over at the Rumor Mill there is a page which describes the CNBC interview of Ron Insana, with a very highly-respected funds manager, who has spent 53 years on Wall Street, and sees what is coming.....and it is not a pretty sight to behold...........
We are very near the end of the current terminal inflationary period, which will end exactly as he says it will......"Pray that you be found worthy to escape all these things"........
Come, Lord Jesus (soon already !)
YSIC Arlene
[link to www.rumormillnews.com] |
| .
User ID: 15809
7/6/2005 11:24 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
With thanks to CAFP
Concerned Aussie from Perth
User ID: 9874
7/6/2005
9:41 pm EDT
Hedge Funds: The Corpses Multiply. .....and the bodies float to the surface. Wake up to reality.
This problem is getting worse by the day/week. Gee whiz and most are oblivious to it.
G8 HA! what can those bunch of clowns do.
FYI
This article appears in the July 8, 2005 issue of Executive Intelligence Review.
G-8 Meet To ´Manage´ Hedge-Fund Crisis
by Lothar Komp and Nancy Spannaus
The meeting of the Group of Eight industrialized nations, to be held in Scotland July 6 to 8, is reported as dealing with issues like debt forgiveness for the world´s poorest nations, and global warming. But just a week before the scheduled meeting, the Bank for International Settlements (BIS) released its annual report, indicating that a very different set of topics is likely to be on the agenda: how to manage the barrage of risks that could devastate the global financial system. The BIS report summarized the discussions ongoing among governments and international banking circles about whether the world needs a new "international macro-financial stabilization framework," and said that three approaches to this question are being discussed:
1. The establishment of a single international currency;
2. Reverting to "a system more like that of Bretton Woods"; and
3. "Informal cooperative solutions," that is, crisis management.
A highly placed U.S. intelligence source has informed EIR that the discussions on returning to a Bretton Woods system, indeed reflect debate about Lyndon LaRouche´s proposals, but, as the BIS report indicated, the bankers will be pushing hard to get a crisis-management arrangement, with structures defined by the bankers, who are desperately trying to preserve their control under conditions of impending meltdown.
Among the largest risk factors, according to the BIS report, is "the widening current account deficit of the United States," which "could eventually lead to a disorderly decline of the dollar, associated turmoil in other financial markets, and even recession. Equally of concern, and perhaps closer at hand, it could lead to a resurgence of protectionist pressure."
Another area of grave concern is the credit derivatives market. The "explosive growth" of CDS and other credit derivatives contracts belongs to "the most significant developments in finance in recent years." "The notional amount outstanding on CDS contracts globally reached $4.5 trillion at end-June 2004, up sixfold from end-June 2001."
In spite of the recent turmoil triggered by the downgrading of GM and Ford, the real stress test of the credit derivatives market is still to come, says the BIS: "It remains to be seen how the CDS and CDO markets would handle a string of credit blow-ups or a sharp turn in the credit cycle.... One concern is the impact of highly leveraged positions on the balance sheets of financial institutions when markets turn. Another is the nature of the systemic role played by highly leveraged institutions such as hedge funds in affecting market liquidity; two-way markets could conceivably disappear as protection sellers exit at precisely those times when default insurance is needed most." As investors were able to anticipate the downgrades of General Motors and Ford, the report states, "the events of spring 2005 might not be a true reflection of how these markets would function under stress."
To put it more plainly: The BIS says that the situation in the credit derivatives market is already precarious; however, it will get worse, and it might entirely collapse.
Hedge Funds: The Corpses Multiply
And then, there are the hedge funds, whose corpses are beginning to float to the surface. The hedge funds and derivatives trade divisions of the major banks are currently in a near panic, desperately trying to limit the shock waves of derviatives and hedge-fund losses that were apparently triggered by the collapse of General Motors. They are trying to avoid even the hint of danger for the system, but it´s not working.
It´s not unusual for one out of ten hedge funds to collapse in the course of a year, without fanfare. Almost always these are small or medium-sized funds. But now, suddenly, and for the first time since the LTCM drama in Fall 1998, the large hedge funds are coming onto the radar screen. Three of them have recently acknowledged their dissolution:
Bailey Coates Cromwell Fund, London. It was founded in July 2003 by Jonathan Bailey and Stephen Coates, formerly working at the London section of the U.S. securities firm Perry Capital. The fund was able to accumulate $1.3 billion in capital and another $2 billion in bank credits. Bailey Coates was exposed in particular to bets on U.S. stocks, and for the past few months, it has found itself on the wrong side of such bets. Initial losses led to large withdrawals by investors.
According to EuroHedge, a private institution that tracks the European hedge-fund "industry," the capital of Bailey Coates imploded to $635 million by early June. On June 20, the management announced the fund´s immediate liquidation.
Marin Capital, California. The fund was founded in 1999 and raised $1.7 billion in capital. Marin Capital specialized in credit derivatives related to convertible bonds. Exactly these kind of bets led to extreme losses after the downgrading to junk of General Motors. In mid-June, the management decided to liquidate the fund.
Aman Capital, Singapore. The fund was set up in September 2003 by top derivatives traders at UBS (the largest bank in Europe), and Salomon Brothers, and was intended to become Singapore´s "flagship" in the hedge-fund business. But by the end of March, the fund´s capital already had shrunk to $242 million. In April, Aman Capital suffered large derivatives losses. In a statement, published by London´s Financial Times on June 20, the managers of Aman Capital acknowledged that "the fund is no longer trading," and that they will distribute whatever is left of the capital to investors.
UBS is believed to have lost several hundred million dollars which the bank had invested in Aman Capital. Temasek, Singapore´s government investment agency, reportedly also lost money at Aman Capital.
London in the Lead
More hedge funds, with capital in the range of billions, may find themselves in a declining situation and could face liquidation soon. Among these are 2 of the 16 hedge funds of GLG Partners in London, one of the largest hedge-fund groups in the world. The GLG Credit Fund, from January to the end of May, had already lost 14.5% of its capital, in the range of $1 billion; the Neutral Fund of GLG lost about 17.2%, or $2.5 billion. The latter fund had worked with the same contracts as Marin Capital. Recently, nervous investors took out about $1 billion from the Credit Fund and the Neutral, after being informed of the new situation at the end of May.
The GLG Group was established in 1995 by three partners of Lehman Brothers. A fifth of the start-up capital came directly from Lehman Brothers. The invested capital of GLG today stands at around $14 billion and exceeds that of LTCM many-fold. One could put it this way: What Argentina was for the loans of sovereign debtors, and General Motors was for investment loans, so was GLG Partners for the European hedge-fund sector.
At the beginning of June, GLG held the designation of the "most respected" hedge fund in London. The now-collapsed Bailey Coats Cromwell Fund was also winning prizes. Two of the four funds of another leading hedge-fund group in Europe, Vega Capital, also must have suffered serious losses this year.
At the same time, the leading investment banks have achieved their worst quarterly results in years. On June 18, Goldman Sachs announced a collapse in profits of 20%. On Wall Street, this has been combined with ongoing turbulence among the hedge funds and credit derivatives. Goldman Sachs´s Financial Officer David Viniar tried hard to deny the situation: One can "not always be on the winning side," he said, and "rumors that the firm must have put up with quarterly losses due to bets on GM and Ford Motor, are exaggerated."
On May 22, Morgan Stanley announced a collapse of quarterly profits by 24%. Chief Executive Philip Purcell was forced out only nine days later.
Interest Rates and Loans
These events are directly linked to the so-called Greenspan "conundrum." In his address to a June 6 banking conference in Beijing, Federal Reserve chief Alan Greenspan again picked up the issue of the alleged "mystery" of the contrary movement of short-term and long-term interest rates. Although central banks, in particular the Federal Reserve and the Bank of England, had recently pushed up short-term interest rates, the yields on medium- or long-term government bonds are still falling—in some cases even below short-term rates. In a statement on June 20, Lyndon LaRouche noted that there isn´t any "mystery." The discrepancy is "exactly what should have been expected as a result prompted by the way in which the General Motors crash has exposed the unstoppable character of the collapse of the marketable credibility of the already ´lame duck´ George W. Bush Presidency," LaRouche said.
Obviously, the European Union, particularly in its current precarious state, cannot "provide even a relatively short-term refuge from a collapsing U.S. financial system," LaRouche said. This means that "everywhere, in the real universe, there is no longer any security for the present world monetary-financial system, even during the short term." Under such circumstances, government bonds, regardless of their yields, are now appearing as the only form of financial paper that offers any long-term value. LaRouche emphasized: "In short, it is the survival of the principal, not the rate of the premium on the relevant paper, which determines its perceptible value to any moderately sane investor."
In line with this assessment, the rush into government bonds reached dramatic dimensions in the trading week ending June 24. This panic-buying again pushed up the prices and drove down the yields of government bonds. Further contributing to this dynamic is the expectation that central banks will soon be forced to cut short-term rates in reaction to economic and financial emergencies. The Swedish Riksbank cut its prime rate from 2.0% to 1.5% on June 21, and there is speculation that the Bank of England and the European Central Bank might soon follow. On June 22, U.S. Treasury prices had their largest gain in seven months, pushing down the yield on ten-year Treasuries below the 4% mark, to 3.93%. Japan the following week saw the biggest decline of government bond yields, down to just 1.205%, since October of last year. In Britain, yields on two-year government bonds fell to 4.17%, the lowest since January 2004.
Perhaps the wildest action took place in the Euro-zone. In Germany, the yield on ten-year government bonds fell to 3.10% on June 24, the lowest since the Bundesbank records began in 1973. Since mid-March, ten-year yields have plunged by 70 basis points. According to reports, German government bond yields are now actually the lowest since the times of Bismarck in the 1890s. Since June 22, investors buying two-year German government bonds are being promised a yield of less than 2%, that is, less than the short-term interest rate set by the European Central Bank. But investors buy nevertheless. In the two days of June 21-22, Euro-zone government bond yields experienced their biggest drop since Sept. 10, 1998; that is, exactly the time between the Russian GKO default and the collapse of LTCM.
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| Anonymous Coward
User ID: 485
7/6/2005 11:27 PM | | .
User ID: 9836
7/7/2005 10:27 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
China ´to Allow Bank Gold Sales´
July 6, 2005
CNN
Photo: Gold is being quoted at just above $423 an ounce in Asia on Wednesday.
SINGAPORE (Reuters) -- China will allow the country´s four major commercial banks to sell gold bars to their customers in the near future to boost demand for investment, dealers said on Wednesday.
Currently, individuals in China are only allowed to buy gold-backed certificates from the Bank of China and the Industrial and Commercial Bank of China, dealers said.
Account holders use the certificates to trade in gold instead of buying or selling real bullion.
Gold firmed in Asia on Wednesday as the dollar fell from a 14-month high against major currencies, but dealers were careful about buying too much ahead of a key report on U.S. jobs.
Demand from Asian investors and jewellers emerged at lower levels, but dealers said the physical market will be quiet in Europe during the northern summer holidays. Gold was likely to trade in a tight range of $422-$425 an ounce, they said.
Spot gold was quoted at $423.35/423.75 an ounce, versus $422.60/423.30 last quoted in New York.
Gold has lost more than 4 percent in value since hitting a 3-month high at $443.60 an ounce on June 24 -- just a few dollars away from this year´s high at $446.70 hit on March 11.
A strong dollar diminishes gold´s appeal as an alternative asset as it makes dollar-priced gold more expensive for holders of other currencies.
[link to edition.cnn.com] |
| .
User ID: 9836
7/7/2005 10:30 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
"There was also a spate of competitive devaluations in the 1930s, called the "beggar thy neighbor policy" of shifting the costs for the neighbors to bear. True, as the dollar has declined, so has the real value that foreigners pay to service their debt to Uncle Sam. But that works only if they can themselves earn in currencies that have increased in value against the dollar. Otherwise, foreigners earn and pay in the same devalued dollars, and even then with some loss from devaluation between the time they got their dollars and the time they repay them to Uncle Sam. China and other East Asian nations do earn in dollars, to which they have pegged their currencies, so they have already lost a substantial portion of their dollar stake, by far the world´s largest.
And they, like all others, will also lose the rest. For Uncle Sam´s debt to the rest of the world already amounts to more than a third of his annual domestic production and is still growing. That alone already makes his debt economically and politically never repayable, even if he wanted to, which he does not. " |
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User ID: 9836
7/7/2005 10:33 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Concerned Aussie from Perth
User ID: 9874
7/7/2005
10:31 pm EDT
Re: Don´t get sucked in by London Terror Event. You know it´s Neo-cons and City of London$$$ ..you bet.
Hello all.
This sums up the mood. Only now it´s a year later
""LaRouche Presidential campaign statement, "Jacobin Terror Aims at D.C." In it, the candidate said, "The world is presently gripped by the biggest, most deep-going, most deadly financial and monetary crisis since Europe of the middle-to-late Fourteenth Century. We are in a period in which economic and related circumstances have made the idea of regular modern warfare a sick joke; in which regional and other ´little wars,´ terrorism, political assassinations, and other forms of destabilization, are leading items on the agendas of many of the strategic planners. The financial and monetary crisis in its presently advanced stage, drives desperate political forces to the brink, desperate political forces who would ratehr drive civilization itself to the brink, than tolerate the changes in financial and monetary institutions which the present crisis-situation demands."""
LONDON COMES ALONG. Pattern is so so clear.
It´s just a year later. |
| .
User ID: 9836
7/8/2005 12:03 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Precious-metals ´demand shock´ possible - economist
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For the past three years gold has marched in lockstep with the dollar.
As the dollar weakened, at first due to declining US interest rates, and later from fear of growing imbalances, the gold price rose in dollar terms, FNB chief economist Dr Cees Bruggemans writes this week in his ´Weekly Comment´ article.
However, the gold price hardly changed in euro terms, which, he says, indicates a certain ´aloofness´ to global affairs.
Over the past two months, however, this pattern has changed.
While the dollar has strengthened and Europe´s political and economic attractiveness has suffered, gold did not ease off in dollar terms, remaining neutral in euro terms, as was to be expected on past performance.
Instead, gold regained its best dollar level of $440/oz and has risen against the sinking Euro, Bruggemans writes.
He concludes that, “something seems to have changed the market view of gold´s value” although it is difficult to discern what factors are driving the physical gold price at the specific moment.
Bruggemans mentions jewellery and industrial demand as being influencing factors, but suggests that, as a financial insurance instrument, gold´s role appears dormant at present.
Further, he questions whether gold could be experiencing a ´demand´ shock, like many other commodities, such as oil, coal, iron-ore, copper and others as a result of steeply-rising Chinese (and Indian) demand.
Such a physical explanation for the sudden gain in the ´real´ gold price sounds plausible, except that this Asian factor has been building up in other commodities for some three years, without registering at all the gold price, says Bruggemans.
Nonetheless, he warns that a ´demand´ shock may still well loom for precious metals, as much as it appears to be affecting other commodities, at least until supply catches up.
He suggests that a more likely explanation for gold´s sudden liveliness in the short-term, however, is its old role as a store of value of last resort in uncertain times.
”Global bond yields may be eroding and inflation expectations contained, with some lingering concern about global deflation - not a gold-friendly environment.
”But the fact of the matter remains that this is taking place against the strangest of backgrounds, in which global imbalances are steadily expanding.” He goes on to pose the question whether the market is seeing the return of risk aversion, observable in wider corporate (and emerging) bond spreads, as well as the ´slight tremor´ in real precious-metal prices.
Global trade is being restricted by policy measures that are actually damaging to global economic progress and, while the dollar may have gained value in the short term, the global imbalances continue to expand unchecked.
Bruggemans says that, unless this is tackled through positive economic growth, the only other route would be significant currency changes, which would be potentially damaging in the long haul.
Bruggemans writes that, although rising commodity prices are not generally seen as a global inflation threat, at least its energy component is viewed by many (especially in global bond markets) as a tax on global income with considerable deflationary potential in a low-interest-rate environment.
Any small change in global risk-aversion sentiment would also register in the gold price, as the physical gold stock is small, perhaps worth $1-trillion, compared to $50 trillion of private US wealth, and perhaps four to five times that globally.
If the shifts outlined by Bruggemans are valid, then he says that, global imbalances still expected to widen, currency volatility likely to deepen, and commodity prices to become yet more roguish, there is potentially room for a precious-metal demand ´shock´, although he believes its origin may be global and financial rather than based on Asian factors.
For South Africa, as a key precious-metal producer, such developments in precious-metals prices would have significant implications, which would be registered in national income, the value of the exchange rate, interest rates, asset markets, and the manner this would influence confidence, fixed investment and consumption.
”It remains to be seen whether we are only imagining a trend break in precious metal price relationships or whether something deeper is really stirring.
It certainly would have major implications for us if it turned out to be for real,” Bruggemans concludes. |
| Anonymous Coward
User ID: 4541
7/8/2005 12:15 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
they should have smashed today and they did not. |
| .
User ID: 4420
7/9/2005 1:28 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Monetary Incest
Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
Jul 6, 2005
- Last Friday, around three o´clock in the afternoon, something snapped in my brain, and the last thing I remember was when I saw that the national debt exploded upward by $60 billion dollars. In one day! Then next thing I know, I am lying on the floor and staring up at the ceiling, wondering how in the hell I got here.
It was several hours and a pepperoni pizza later before I finally, and grudgingly, returned to my usual reality of being another face-in-the-crowd frightened paranoid lunatic, driven berserk by the insane monetary policy and the mutant brand of ridiculous economic theory that we are operating under. Then, just as I was putting my shattered life back together, I see that the banks, last week, gobbled up $53 billion in government debt! This was after these same banks SOLD $74 billion last week! My breath started coming in ragged gasps, and next thing I know, I am lying on the floor and staring up at the ceiling, wondering how in the hell I got here.
Of course, my suspicious and distrustful Mogambo nature (SADMN) immediately jumps to the conclusion that the government now creates debt and the banks create the money to buy the debt, which is akin to brothers and sisters marrying and having lots of kids, who marry each other and have lots of kids, who marry each other and have lots of kids. You end up with lots of kids, but not the kind you normally want, with the emphasis on "normal." Ditto with economies, if you catch my drift here.
So, staggering unsteadily to my feet, my eyes happened to focus long enough for me to read the statistic that the new Gross Domestic Product Deflator had been revised upward to 2.9%. I could feel my guts churning. The next thing I knew, I had this weird, swirling feeling of overwhelming déjà vu as I was lying on the floor and staring up at the ceiling, wondering how in the hell I got here.
This Gross Domestic Product Deflator thing, in case you were wondering, is the inflation gauge that they use to reduce the dollar value of raw GDP, which is, roughly, just the total dollar amount of sales and exchanges in the economy. But since the dollars that are spent have been continuously devalued in buying power, the prices paid have gone up. So, obviously you can´t have a growing economy if last year you sold ten widgets at a buck apiece, and this year you still sell the same ten widgets, but at two bucks apiece. If you look only at income, it looks like the economy grew 100%! Wow! But I am sure that you noticed, with your penetrating and insightful glare, that the economy still only made ten lousy widgets, so actually the economy, in terms of output, had zero growth. So, you have to reduce those dollar-sales by the amount of dollar depreciation to get "real" (inflation-adjusted) GDP, as measured in constant units of buying power. That reduction is now about 3%.
And since the horrid Boskin Commission (the guys who came up with all those slimy trickster ways to let the government make inflation seem to disappear) was charged with the task of literally erasing about 1.5% of inflation out of the statistics, to get a glimpse of reality all we have to do is add back that 1.5% to the "official" deflator, and now we see that inflation is actually running at 4.5%!
And now, to show you that something very, very weird is going on, let´s take a look at interest rates in the face of this inflation. Short rates are up a little, but long rates are not. In fact, almost all interest rates are actually below the rate of inflation! Damn near every interest-bearing asset, the world over, regardless of maturity, is priced so high that it yields less than the real, unadjusted rate of inflation! This is insane! This is beyond insane! This is out there, past the fringes, where not even The Mogambo will go, even when over-medicated to semi-consciousness!
The yield curve is almost flat, so I figure, and this is where I reveal my ugly, suspicious and utterly distrustful character, that this is caused by the guys who laid on all of those derivatives when the curve was steep, who are now so far underwater that it is threatening to implode the whole scheme. So what to do? Easy! Loan them more money to put on some spreads that bet that the curve will continue to flatten! And use the government to take the stupid, losing end of the trade!
I see hands go up, and being The Mogambo, I can read their minds, and the result is that about 80% of them are lost in pornographic daydreams, and the other 20% are wondering either "What in the hell is that jerk talking about?" or "Did I just pee in my pants?"
"But," I say, "as an offset, as the yield curve steepens, their existing steep-curve derivatives would be back in the money! And they can pay the losses of the narrow-spread derivatives! Everybody wins!" And to illustrate my point, I jump atop my desk and belt out a powerful rendition of "We´re In The Money," where I use this really neat Al Jolson-like voice on the line "We got a lot of what it takes to get along"!
- According to HalfPastHuman.com, the sun is putting out all kind of storms of energy and particles, and oceans of them are washing over the earth. The interesting part, for me, is when they pondered the significance of so much energy being absorbed by the earth, especially along the lines of the famous equation E=mc2, which would seem to dictate that our mass (m) could be increasing as a result of the input of new energy (E). Not much, perhaps, as the total energy input would be divided by the square of the speed of light, but some. Perhaps a lot.
And even if the energy is not converted to mass, the sheer amount of cosmic energy coming into the earth must have some damn effect! I mean, if my wife hurls a frying pan at me, I know she is going to miss me because I am ducking and weaving and taunting her ("Nyah nyah! Missed me again, ya old bag!") But the lamp, the wall and the floor are not so fortunate. So we have proved that large amounts of energy coming into the system WILL have an effect, even if only on the furnishings and bric-a-brac.
And this may explain why, sort of suddenly, there is all kinds of increased/weird atmospheric and geologic activity. Not to mention all the other kinds of behavioral weirdness that seem, suddenly, increased here lately.
- Walter J. John Williams is a guy who has looked at federal spending from an actuarial viewpoint, which means not only looking at cash-flow today, but the future impact of it all, "using generally accepted accounting principles (GAAP)." He adds that "a large portion of the expanded deficit is from the annual increase in the net present value of unfunded Social Security and Medicare obligations."
So how bad is it? He says "The U.S. government´s fiscal ills have spun wildly out of control and no longer are containable within the existing system. The actual annual shortfall in U.S. government operations for fiscal year 2003 was $3.7 trillion. Put in perspective, that means if the U.S. Treasury had seized all wages and salaries in 2003 with a 100% income tax, there still would have been a deficit! The outlook for fiscal 2004 numbers is even worse." And to spare us further horror, he does not even mention that 2005 is going to be even worse! And then people wonder why I am so weird! But to use a line from Randy Newman´s terrific theme song of the TV series "Monk," "People think I´m crazy for worrying like I do. If you paid attention, you´d be worried, too!"
But just this tiny smidgen of information should be enough to make you think to yourself, "The Mogambo was right! The government is a lying bunch of idiots that are destroying our economy!" As if to prove me right, he goes on to provide proof, and he says the "popularly reported 2003 budget deficit was $374 billion, one-tenth the number cited above." One-tenth! The government is admitting only one-tenth of the destruction that it is causing our economic system!
He figures that the true fiscal deficit for 2004 will be prove to be near $4.3 trillion, meaning that the deficit for 2005 ought to be about $5 trillion, which means that in three short years, the buttheads that we elected to Congress have not only spent everything they could get their hands on, but have increased our accrued debt by more than the entire GDP of the country! Everything we, as a nation, produce in goods and services, in a whole year! And this gigantic sum is just the ADDITION to the accrued national debt! And it is getting worse every freaking day!
Seeing that I am sitting here with this stupid look on my face, which he thinks means that I am totally clueless, and he looks at me in disgust. In truth, I am only partially clueless, and the tiny little piece of The Mogambo that is NOT clueless is stunned, and I look like this when I am stunned. Speaking as if he is talking to some slow-witted four-year old, or a Congressperson, he says, with that undertone of pity and contempt that these are "negative extremes never before breached outside the environment of third-world, net-debtor nations, jerk." Well, he didn´t actually finish up by calling me a jerk, but you could tell that is what he wanted to say, so I added that part to show you how everybody hates me, and how they are all out to get me.
So what to do? If you listen to that idiot Mogambo, there is nothing to do, as there are no solutions, and that is why it is imperative that you not get yourself into this kind of stupid mess in the first place. But Mr. Williams is not so negative, or scary, or angry, or as heavily-armed. He says "The unfolding fiscal disaster faces one of only two very unpleasant general solutions. The first solution is draconian spending cuts, particularly in Social Security and Medicare, even if accompanied by massive tax increases. This appears to be a political impossibility, at present.
"In the absence of political action, the second solution is the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely outcome is the Fed eventually having to monetize U.S. debt heavily, triggering a hyperinflation. U.S. obligations eventually would be paid off in a significantly debased and devalued dollar. "
This brings up the point the dollar has grown so strong here lately that it is the highest it has been in over a year! See? I told you things are weird!
- Ned Schmidt has calculated that since about 1990, "the U.S. international net worth has been negative, and is currently just shy of negative $3 trillion. Interestingly, that period of negative net worth for the nation seems to coincide with the reign of Greenspan at the Federal Reserve. Federal Reserve policies seem to be the most likely influences that destroyed the equity of the U.S."
Even Bill Bonner of the Daily Reckoning, who is a real calm and intelligent guy, which are just two of the things that I am not (and by a long shot), has pondered this very thing, and thoughtfully muses, "How we would love to read the history books 100 years from now! What will they make of our strange Pax Dollarium with all its bizarre illusions and silly conceits? At the current rate, the United States squanders its national wealth at the rate of more than 6% of GDP and approximately 1% of its total balance sheet annually."
And this brings us, as you knew that it would eventually, and I can almost hear you groaning and whining "He´s not going to start up about gold again, is he?" and I reply "Yes! Yes I am!" In a stage performance worthy of an Oscar, which I will not get again this year because of political intrigues, I stretch out my mighty Mogambo arm (MMA) as if summoning the thunder of Zeus from atop Mount Olympus, and with a stentorian bellow, I, ummm, bellow, "gold! gold, infidels! O, ye who worship at the altars of paper money and fractional banking, on your knees to gold! If not today, thanking gold for being there to save your nasty, stupid butts, then soon enough you will be on your knees, begging gold to at least save your children´s nasty butts!"
And I say this, with all the beaming confidence that a guy who has no idea what he is talking about can muster, that gold will prosper against a paper, fiat currency because it always has and always will. And a fractional banking system does nothing but make it all a lot more so.
As a proof, I offer Prof. Werner Antweiler, of the University of British Columbia, who has calculated the comparative daily exchange rates of the Japanese yen, European euro, British pound, Canadian dollar, and the US dollar, all relative to gold. The result? I though you would never ask! They are all losing ground compared to gold! And what do these currencies have in common? They are all paper, fiat currencies! And everybody who uses those currencies would have made money buying gold! Hahahaha! See? I told you what would happen! And sure enough, it did!
And you don´t have to take my word for it, or believe your own lying eyes. On the TocquevilleFunds.com site, they write "The dollar price of gold bullion is trading within 3% of a seventeen-year high, despite negative sentiment. Over the past five years, the dollar gold price has increased 50% vs. a 16% decline in the S&P 500 and a 18% decline for the trade weighted dollar."
Ned Schmidt has gone even further, to show you that he doesn´t sit around all day goofing off and making prank calls to the Federal Reserve ("Hello? Federal Reserve? Alan Greenspan is a big butthead! Hahahaha!"), has calculated that other fiat currencies have suffered the same fate, too, and some of these countries are Australia, Mexico, South Africa and Switzerland. Inescapable conclusion, which is immediately comprehensible even to a pitiful moron like me? So I raise my hand and wave it excitedly, wanting him to call on me to supply the answer. But Mr. Schmidt acts like he doesn´t even see me, and says, "What this ddtells us is that investors have been moving away from fiat monies, all of them."
Then, to lighten things up, he adds a little joke, and says that in one sense the USA has a negative book value. Then he asks, "By the way, how many of you would buy a stock that has a negative book value?" which I suppose would probably be real funny, except that all I do is shudder and wonder if I am sufficiently heavily-armed, because when things start reverting to their real value, there are going to be a lot of angry, scared, desperate people. And of all the things I fear, I dread mobs of angry, scared and desperate people, because I have seen a lot of movies, and in the ones that have mobs of these kinds of people, they behave very badly, and usually of a distinctly homicidal nature.
As an aside, apparently there are a lot of other people who watch old movies, as the sales of guns are shooting up, if you´ll pardon the pun. Smith & Wesson Corp. said "firearms sales for fiscal 2005 are expected to increase by approximately 11 percent over fiscal 2004 levels."
- An interesting nugget from Marshall Auerback on the PrudentBear.com site says that, "Over the next fifteen years, to improve living standards, the authorities plan to move three hundred million workers from rural areas where they earn just over one dollar a day, into the towns and cities where they could earn four and a half dollars a day." This means that this is the exact equivalent of the whole population of the USA gradually getting a 450% increase in their incomes. This comes to 10.5% a year! A group the size of the United States is going to get annual 10.5% raises? Wow! Wow de wow wow!
As a point of discussion, what would you say would be the result of wages and salaries increasing by 10.5% a year, for fifteen years, in the USA? And can you equate that with the effect on inflation? Hahahaha! Me, too! We´re freaking doomed!
And this is not something new, either, as Mark Faber tells us that "per capita incomes in China have doubled every 10-12 years for the last 25 years." No wonder they are growing so fast!
- Alert reader Jack W is one of those guys who sent along the perfect word to describe the how the American political system, as do all systems, has evolved. Kak·is·toc·ra·cy, which is a noun that means "Government by the least qualified or most unprincipled citizens." Hahahahha! See? I told you it was perfect!
- And it is not only us, that is being mismanaged into the ground. The Canadian Taxpayers Federation reports that Tax Freedom Day in Canada fell on June 26th this year, as calculated by the Vancouver-based Fraser Institute. They explain that Tax Freedom day "is the day you stop working for government and start working for yourself. Prior to June 26th the equivalent of all your income went to pay taxes to the three levels of government."
This year it occurs one day later than in did last year, "and fully 12 days later than it did in 1995!" They attribute it to the growing number and level of taxes that they have to pay.
In short, Canadians "worked 103.5-days to pay the federal government, another 64 days to feed the provincial government, and a final 9.5 days to satisfy City Hall. Total: 177 days, fully 48% of our incomes!" Forty-eight percent of income! And before you get all weepy-eyed about the poor Canadians, I remind you that we pay, to local, state and federal governments, roughly that much here in the USA!
- Martin Weiss of the Safe Money Report says that "the ´household debt service ratio,´ which how much of the average household´s disposable personal income goes toward debt payments on everything from mortgage to consumer debt. In the first quarter, it hit 13.4 cents per dollar -- the most ever."
This seems bad enough, but he goes on to say "And that´s just an average! If you factor out the wealthiest families, you´ll find that typical homeowners are spending 40%, 50% ... even 60% of their incomes on their house payments alone -- to say nothing of their other debts." Which are also so big that they have set a new world record!
- It looks like things are going to get rough in Mexico, as explained by Roland Watson in his essay, "Mexico: the State, Oil and silver" on 321energy.com. He says that untoward things are happening at the huge Cantarell oil field. "Since the field came online in 1979," he writes "reservoir pressure has continually dropped as production extracted more and more oil. The crunch came in 1999 when production began to decline and massive injections of nitrogen gas were employed to stabilise reservoir pressure. At 1.2 billion cubic feet of compressed nitrogen per day, nearly half of global nitrogen production was used on the Cantarell field." Wow! Now that´s an interesting fact I never heard of! Half the global production of nitrogen is being pumped into the ground in Mexico! "Mexico joins the growing list of countries in oil production decline. So with liabilities of $88 billion dollars (four times that of Exxon) and an annual investment requirement of $10 billion just to maintain current production levels, Pemex is on the verge of bankruptcy." Uh-oh.
- The outrage over the Supreme Court´s Kelo v City of New London decision to allow a city to force a homeowner to sell his house to a developer has occasioned today´s installment of positively poetic justice (PPJ). To wit, a group of investors has petitioned to have the house of Supreme Court Justice David H. Souter turned over to them to construct a hotel, which they plan to call "The Lost Liberty Hotel." It will also feature a "Just Desserts Café" and a museum "featuring a permanent exhibit on the loss of freedom in America." I love it!
- Christopher Farrell, writing the essay "Greenspan: Wizard or Villain?" on msnbc.com, divides people into two camps. On the one side, we have what he calls "The hairshirts," who "believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom." Apparently we, speaking for the hairshirts everywhere, are the stupid scumbags of the world. On the other hand, we have what he calls "Growth proponents - and there´s none greater than Greenspan - believe that it´s better to limit the fallout of a bust and get the economy growing again as quickly as possible." Did you note that one side is dismissed as the pejoratively-labeled "hairshirt" idiots, and the other side is gloriously called "growth proponents" instead "raving lunatics"?
So it is better to let my daughter speed dangerously in her car and clean up the mess when she inevitably crashes, rather than stop her from speeding? And it helps the economy for me to constantly put bigger and bigger engines in her car the whole time? Wow! No wonder I always win the "World´s Worst Dad" award!
Then to make sure that you understand that he is a "journalist" and not an economist, he goes on to say, "To the hairshirts´ way of thinking, the great mistake Greenspan made was not allowing for a vicious economic and financial downturn to purge the speculative excesses built up during the heady ´90s." No, you little jackass twerp! That is not it at all! The great mistake, and you might want to write this down since it is the whole crux of the matter, was allowing the damned speculative excesses in the first damned place! But nooOOoooo! Greenspan is directly responsible for the creation of so much, so excessively much, so incomprehensibly much, so impossibly much money and credit, which financed every damn one of the damn speculative excesses, which now need to be purged, because there is nothing else to be done with them, and with all of the attendant misery.
So we are NOT quibbling about how best to correct huge boneheaded and criminally-stupid mistakes with monetary policy. What we should be quibbling about is where in the hell YOU were, you and your rapier-like journalistic wit and vast economic-savvy, the entire time this Greenspan putz was doing this monetary insanity? And now we are supposed to think that this Greenspan fool, who caused our misery, is the best person to correct the mistakes he himself made? Hahahahaha! Journalists! Hahahahaha!
To prove that Alan Greenspan is a real first-class bonehead, Richard Schlessel sent me this snippet of an interview, where Alan Greenspan was asked, "Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?"
Greenspan is reported to have said "Well, I wouldn´t say that the pay-as-you-go benefits are insecure, in the sense that there´s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody." This is exactly right, they are secure Although he leaves it to the reader to extrapolate to the correct conclusion that the money that the government will print with such insouciance will be, as a result, worthless, as far as using it to buy things is concerned.
But then he goes immediately to a non sequitur when he says, "The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase?" What in the hell is THAT supposed to mean? Is he asking, "How do you keep inflation from destroying everything when all that money, that staggering, gigantic towering mountain of money, flow into the economy?" Is he saying that he wants to somehow direct all of that money into the stock market and the bond market and the housing market? What? What is he saying?
Mark Faber of the Gloom, Boom And Doom Report is another guy who also believes that the Federal Reserve is incapable of dictating where money goes. He writes that the Fed creates money like water, and "when there is a problem they just replenish the water level of this fountain, or of this lake, and then it overflows. And whereas the Fed controls the quantity of money that comes into the system - more or less, they don´t control it 100%, but more or less - what they certainly don´t control is where water, or the money, then flows to. It can flow, as I mention, in the 60s into wages, in the 70s into commodities, and consumer prices in the 80s, notably into Japanese stocks and real estate, and then in the 1990s into the Nasdaq, and now more recently into the real estate market."
That is bad enough, but even worse is that it is, as he says, "uncontrolled - and if the door is open, or the system, then the money can one day also flow out of that door, which leads to weakening currency."
Jim Puplava, seeing Mr. Faber and me yammering back and forth and getting all the attention, says that he agrees, too. "When central banks stimulate, or print money - it stimulates something: sometimes production; sometimes employment; sometimes assets." The worse part is that "it annihilates thrift; it destroys, in my opinion, moral and intellectual values; it creates the wealth disparity."
Mr. Farrell then writes, "The critics say Greenspan has transformed the economy into a giant bubble, concocting one even greater than the one that already burst. The longer he delays the day of reckoning, the worse the fallout will be when the bubble pops." Yes, that is EXACTLY what I say, and that is exactly what history proces, and that is what everybody who knows the least bit about economics says.
But Mr. Farrell is not interested in any of that. In fact, he dismissed me with a wave of his hand, as if shooing away a perky fly, as he goes on to say "That´s a severe indictment - but not necessarily a valid one. A problem with the anti-Greenspan mindset is that hairshirt economics was largely discredited during the Great Depression." Huh? It was? Excitedly, I pull my chair up closer, because this is big news to me! I am on the edge of my seat to hear how this was "discredited during the Great Depression"!
Seeing that I am at full attention, ready to hang on his every word to soak up this important new knowledge like a sponge, he says "Mainstream economists of all schools, from Keynesianism to monetarism, turned away from hairshirt economics after the Great Depression." Huh? Another new revelation! I never heard that before, either! Sensing my stupefaction at the enormity of what he is saying, he explains "They realized that the government could play a positive role in counteracting contractionary forces in the economy." Hahahahaha! I laugh in contempt at such a statement!
Wiping the tears of laughter from my eyes, it is difficult for me to stop laughing, because everyone, in all periods of history, all know from the cradle to the grave that the government can cause a boom! This is because history is essentially one long, tiresome lesson in how all governments did this very thing, at one time or another, and the economy always got the boom, and then they all paid a heavy, heavy price, sometimes literally destroying the economy. And then every government, facing the inevitable economic contraction, then went after more money, usually by declaring a war, so that they could, as he says, "play a positive role in counteracting contractionary forces in the economy." And yet this Farrell guy thinks that only after the Great Depression, not even eighty years ago, (which was caused by the newly-formed Federal Reserve acting like profligate jackasses even then, creating huge amounts of money and credit to counteract, supposedly, the recessionary slowdown following WWI, and thus financed the Roaring Twenties), did people realize, and pardon me from laughing out loud, but I can´t seem to help myself, that deficit-spending by a government could counteract "contractionary forces"? Hahahaha! I can´t help myself! Hahahaha!
But, to be fair, Mr. Farrell is, after all, just a journalist. And we have learned that nobody requires journalists to know what in the hell they are writing about, but only that they write something to fill up empty pages.
But this is not a valid excuse for the esteemed Economist magazine, and they need one, as you will discover when you read the Economic Focus page, entitled this week as "Beware the Bubbles." First they describe how massive imports of low-cost Chinese goods kept the American consumer´s "market basket" from going up in price, thus preventing inflation in those goods, as "Deregulation, new technology and the integration of China into the global economy have also reduced the prices of many goods, making it easier to keep inflation low." Wow! Let me see if I have this straight, since being a real stupid guy makes it so hard for me to understand these difficult concepts; China made stuff and sold it to us cheap, and this kept some prices down, and thus inflation, as measured by the movement of prices, was extraordinarily low. So now we turn right around and say that the central banks kept prices down and inflation low? By doing what, you morons?
But then without even pausing for breath, they launch into how the Bank for International Settlements (popularly know by its acronym, BIS), is growing concerned "about a different kind of risk: the rapid growth in debt and asset prices. Ironically, this is partly due to the central banks´ success in defeating inflation." Hahahaha! What a bunch of morons! After explaining how a lack of consumer-price inflation was due to China and other low-cost producers coming on-stream, the Federal Reserve is given credit for it!
Hahahahaha! Pardon me while I double over in laughter at the thought! Hahahaha! Notice how I am already grinning from ear to ear, on the verge of busting out laughing like some demented hyena-like creature, only with more drooling and snarling, at that punch line. And the punch line is that the central banks have had "success" in defeating inflation! Hahahaha! Snarl! Drool! Snarl! The damned central banks have been creating inflation with both hands years and years, and the only things that have NOT shown price-inflation is because of the consumer items made by the Chinese? And yet this is some kind of weird proof of "the central banks´ success in defeating inflation"? Hahahaha! This is the Economist magazine, so you have MORE proof that things are getting really, really, really weird!
Anyway, the BIS apparently recommends, according to this article, that we immediately raise interest rates "even if inflation remains tame." And if inflation does NOT "remain tame?" Hahahaha!
- Senators Lindsey Graham and Charles Schumer have been convinced by Alan Greenspan and John Snow to drop their idea of levying punitive tariffs on Chinese imports, designed to force China to release the peg of the Chinese yuan to the dollar. The idea, and you are going to love this, is that our exports would become relatively cheap, although we Americans would not notice any difference in the prices we pay. But with this price differential, people in other countries would be unable to resist a bargain, and so we would sell more American-made stuff to them, and the American economy would again grow strong and we would again strut around the world, thumping our chests in pride and crowing about "the American way" and killing anybody who disagreed with us.
But the plans for the tariff are on hold (insert exciting video footage of a hand flipping a switch to "off") because the Senators have been told by these Federal Reserve and Treasury Department worthies that the have some secret, inside poop that the Chinese will revalue their currency within the next couple of months. Guaranteed. This is news to everyone else, I am sure.
Especially those foreign guys who have long-term contracts specifying that they be paid in dollars, and who must have soiled their pants when they heard that, like I almost did, but I never smelled anything, and I didn´t want to look. So no harm, no foul.
But this re-pegging this is nothing but bad news. If the Chinese re-peg the yuan against the dollar, thus devaluing the dollar, then if oil (which is priced in dollars) does not change in price, then oil will become instantly that much cheaper for the Chinese. They will, I assume, buy more at the lower price, driving up demand. But supply, which is already being pumped at the extreme limits that the production / shipping / refining system will allow, will not increase. Therefore, oil will go up in dollars, thanks to the demand /supply imbalance, as dictated by Economics 101.
Even worse, the oil producing nations will soon get very, very tired of accepting dollars that are losing value, and will either 1) suffer the loss, which I don´t expect, 2) raise the dollar price of oil, or 3) start asking to be paid in some other currency that is NOT losing value. That means that the price of oil, in dollars, will go up some MORE! Yow! As we near Peak Oil (half of the world´s recoverable supply is gone) and its increasing crimping of supply, plus a dollar that is losing value, the price of oil will thus continue, for the rest of the life of the silly paper US dollar, go up and up.
And not only that, but American products like food will be cheaper to the Chinese, so they will buy more, which will allow American producers to charge more, which makes prices go up, which even we Americans will have to pay, and this is the whole ugly side of price inflation. Damn! It´s like I´ve been saying all this time; there IS no way out of this stupid mess caused by the Federal Reserve.
- Bill Gross of PIMCO, the big bond fund behemoth, predicts that the Federal Reserve will lower interest rates by this December, sixth months from now. The economy will be slow slow slow, with money being lost at such a clip that the Fed will be forced into creating more money and credit and lowering interest rates to entice people to borrow and spend and go farther and farther into un-payable debt. This could very well be our fate.
This is, of course, the Japanese fate, who also famously created too much money and credit and have suffered for their profound error for fifteen freaking years in a row, and it may be our fate for fifteen years or more, probably more.
But you will never hear of anything that ever even hints that anything is wrong with the economy. One reason is all comes down to the famous, (or infamous, depending on your perspective) line of crap from that commie-bastard FDR, namely "We have nothing to fear but fear itself." Wrong, bozo! Even in the best of times, there is plenty to fear. And in the worst of times there is much, much more to fear.
- There have been increasing howls about the cost of the Iraq war. Relax. All that money is going to somebody, and then it goes to the employees and owners, and to the suppliers, and then to THEIR employees, owners and suppliers, then somebody else, and, on and on and on, until eventually it filters down to you and me, you by earning it through hard work and long hours, and me getting it from complete strangers if I promise to just go away, usually with the proviso that God´s sake I will shut up about how Federal Reserve monetary policy is destroying our money, and how we are going to be destroyed, and I always figure, "Sure! Why not? A buck´s a buck!"
- Some bad news in China is that their stock market is at an 8-year low. The cumulative fall is, so they say, greater than the fall of NASDAQ. No wonder that their government is, like ours, desperate to get them back up.
- An interesting follow up to last week´s blurb about the Banister case and the income tax. It turns out that he was actually acquitted only of conspiracy, and it has nothing to do with the income tax itself. The more interesting part is that, although there is some confusion as to whether the Sixteenth Amendment (authorizing an income tax) was ever actually ratified or not, it doesn´t matter. A subsequent Supreme Court ruled that an income tax was already allowed by the Constitution, because it was, according to these Supreme Court guys, an indirect tax, as opposed to a direct tax. The distinction being something about how one is levied to the states in some disproportionate degree, according to a tax/population ratio, I suppose, or something, and the other is not, or something.
The result? Banister was acquitted of conspiracy because he was not conspiring to do anything illegal. The guy who did not pay his taxes, based upon the theory, went, predictably, to jail for not paying his taxes. A sad tale ends even sadder.
- A new wrinkle in the credit fabric has appeared, in that I was called on the phone about a new program for Discover cardholders. For the sum of, as I recall, eighty-five cents per month per hundred dollar´s of credit balance, you can enroll in their little program that will allow you to freeze your account for up to two years. During that time, you can´t buy more stuff in this "frozen" account, of course, but you don´t have to make any payments, nor will they charge you any interest on the balance.
The kicker, as I discovered when I asked some further questions of the girl on the phone (e.g. "Can I borrow your shoes?" and she says, playing the coy little temptress that she was, "Ewww! Ick!"), is that as soon as you choose to start paying off that frozen account, (or, presumably, at the end of two years when you are REQUIRED to start paying off the account), interest again starts being charged against your balance! And at an interest rate that will be determined at that time, and they don´t want to make a guess about how high the interest rate would be, as THAT is certainly not frozen! So for paying a monthly fee of 0.85% of the total amount you owe, a fee that compounds to over 10% a year (alarm bells should be ringing in your head, going "ding ding ding ding!"), you get to stop buying stuff and stop paying for stuff! Hahahaha!
- Dan Denning of Strategic Investment makes the astounding prediction that "China´s Communist government will collapse within 10 years." He thinks that this is inevitable since "when you unleash the powerful human desire to be rich, the desire to be free is not far behind´, which is probably true. But according to the Mogambo dim view of things (MDVOT), I figure that governments always want more money than they can reasonably get, and sooner or later they go after the rich guys to get more money out of them, and THAT is why the urge to be free follows the urge to be rich. Oddly enough, the best idea is to first be free, and that freedom produces the riches, prosperity and wealth as Adam Smith´s "invisible hand" of free enterprise performs its magic.
But no matter what follows what, it is working in China, as we conclude from Marc Faber, who has also done some interesting analysis. He says that "China has officially a GDP of $1.3 trillion and the US has a GDP of $11.7 trillion. It doesn´t reflect the reality. The Chinese GDP, adjusted for the price difference between China and the US, is probably already about 60% of the US economy, and the second largest economy in the world."
Now, if the Chinese yuan would be devalued by almost half, would the Chinese economy then be equal to the American economy according to this analysis? Yes. And if two economies are equal in size, which one gets to be dominant?
Ugh.
***The Mogambo Sez: I am surprised at how gold is going down here lately. From the various lease rates for gold, it looks like to me that that money is being put into a calendar spread. Inescapable conclusion: I have no idea what I am talking about. But if I did know what I was talking about, I would say that this looks extremely, extremely bullish for gold, and that the temporary fall in the price of gold is a fabulous buying opportunity.
But it is more than that, as Billy, one of the guys I play racquetball with and who likes trying to make a little money by playing in some market or another, or hatching some business deal, or exploiting some price discrepancy, or some exploration or something, it´s always something, but never gold, is suddenly interested in gold. After all this time. He says he has heard some good things about gold and is convinced enough to get some. This is how manias begin, not how they end.
Richard Daughty
email: scgcjs@gte.net
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The Daily Reckoning
Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron´s, The Daily Reckoning and other fine publications. |
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User ID: 4420
7/9/2005 1:29 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Especially those foreign guys who have long-term contracts specifying that they be paid in dollars, and who must have soiled their pants when they heard that, like I almost did, but I never smelled anything, and I didn´t want to look. So no harm, no foul.
But this re-pegging this is nothing but bad news. If the Chinese re-peg the yuan against the dollar, thus devaluing the dollar, then if oil (which is priced in dollars) does not change in price, then oil will become instantly that much cheaper for the Chinese. They will, I assume, buy more at the lower price, driving up demand. But supply, which is already being pumped at the extreme limits that the production / shipping / refining system will allow, will not increase. Therefore, oil will go up in dollars, thanks to the demand /supply imbalance, as dictated by Economics 101.
Even worse, the oil producing nations will soon get very, very tired of accepting dollars that are losing value, and will either 1) suffer the loss, which I don´t expect, 2) raise the dollar price of oil, or 3) start asking to be paid in some other currency that is NOT losing value. That means that the price of oil, in dollars, will go up some MORE! Yow! As we near Peak Oil (half of the world´s recoverable supply is gone) and its increasing crimping of supply, plus a dollar that is losing value, the price of oil will thus continue, for the rest of the life of the silly paper US dollar, go up and up.
And not only that, but American products like food will be cheaper to the Chinese, so they will buy more, which will allow American producers to charge more, which makes prices go up, which even we Americans will have to pay, and this is the whole ugly side of price inflation. Damn! It´s like I´ve been saying all this time; there IS no way out of this stupid mess caused by the Federal Reserve.
- Bill Gross of PIMCO, the big bond fund behemoth, predicts that the Federal Reserve will lower interest rates by this December, sixth months from now. The economy will be slow slow slow, with money being lost at such a clip that the Fed will be forced into creating more money and credit and lowering interest rates to entice people to borrow and spend and go farther and farther into un-payable debt. This could very well be our fate.
This is, of course, the Japanese fate, who also famously created too much money and credit and have suffered for their profound error for fifteen freaking years in a row, and it may be our fate for fifteen years or more, probably more.
But you will never hear of anything that ever even hints that anything is wrong with the economy. One reason is all comes down to the famous, (or infamous, depending on your perspective) line of crap from that commie-bastard FDR, namely "We have nothing to fear but fear itself." Wrong, bozo! Even in the best of times, there is plenty to fear. And in the worst of times there is much, much more to fear.
- There have been increasing howls about the cost of the Iraq war. Relax. All that money is going to somebody, and then it goes to the employees and owners, and to the suppliers, and then to THEIR employees, owners and suppliers, then somebody else, and, on and on and on, until eventually it filters down to you and me, you by earning it through hard work and long hours, and me getting it from complete strangers if I promise to just go away, usually with the proviso that God´s sake I will shut up about how Federal Reserve monetary policy is destroying our money, and how we are going to be destroyed, and I always figure, "Sure! Why not? A buck´s a buck!"
- Some bad news in China is that their stock market is at an 8-year low. The cumulative fall is, so they say, greater than the fall of NASDAQ. No wonder that their government is, like ours, desperate to get them back up.
- An interesting follow up to last week´s blurb about the Banister case and the income tax. It turns out that he was actually acquitted only of conspiracy, and it has nothing to do with the income tax itself. The more interesting part is that, although there is some confusion as to whether the Sixteenth Amendment (authorizing an income tax) was ever actually ratified or not, it doesn´t matter. A subsequent Supreme Court ruled that an income tax was already allowed by the Constitution, because it was, according to these Supreme Court guys, an indirect tax, as opposed to a direct tax. The distinction being something about how one is levied to the states in some disproportionate degree, according to a tax/population ratio, I suppose, or something, and the other is not, or something.
The result? Banister was acquitted of conspiracy because he was not conspiring to do anything illegal. The guy who did not pay his taxes, based upon the theory, went, predictably, to jail for not paying his taxes. A sad tale ends even sadder.
- A new wrinkle in the credit fabric has appeared, in that I was called on the phone about a new program for Discover cardholders. For the sum of, as I recall, eighty-five cents per month per hundred dollar´s of credit balance, you can enroll in their little program that will allow you to freeze your account for up to two years. During that time, you can´t buy more stuff in this "frozen" account, of course, but you don´t have to make any payments, nor will they charge you any interest on the balance.
The kicker, as I discovered when I asked some further questions of the girl on the phone (e.g. "Can I borrow your shoes?" and she says, playing the coy little temptress that she was, "Ewww! Ick!"), is that as soon as you choose to start paying off that frozen account, (or, presumably, at the end of two years when you are REQUIRED to start paying off the account), interest again starts being charged against your balance! And at an interest rate that will be determined at that time, and they don´t want to make a guess about how high the interest rate would be, as THAT is certainly not frozen! So for paying a monthly fee of 0.85% of the total amount you owe, a fee that compounds to over 10% a year (alarm bells should be ringing in your head, going "ding ding ding ding!"), you get to stop buying stuff and stop paying for stuff! Hahahaha!
- Dan Denning of Strategic Investment makes the astounding prediction that "China´s Communist government will collapse within 10 years." He thinks that this is inevitable since "when you unleash the powerful human desire to be rich, the desire to be free is not far behind´, which is probably true. But according to the Mogambo dim view of things (MDVOT), I figure that governments always want more money than they can reasonably get, and sooner or later they go after the rich guys to get more money out of them, and THAT is why the urge to be free follows the urge to be rich. Oddly enough, the best idea is to first be free, and that freedom produces the riches, prosperity and wealth as Adam Smith´s "invisible hand" of free enterprise performs its magic.
But no matter what follows what, it is working in China, as we conclude from Marc Faber, who has also done some interesting analysis. He says that "China has officially a GDP of $1.3 trillion and the US has a GDP of $11.7 trillion. It doesn´t reflect the reality. The Chinese GDP, adjusted for the price difference between China and the US, is probably already about 60% of the US economy, and the second largest economy in the world."
Now, if the Chinese yuan would be devalued by almost half, would the Chinese economy then be equal to the American economy according to this analysis? Yes. And if two economies are equal in size, which one gets to be dominant?
Ugh.
***The Mogambo Sez: I am surprised at how gold is going down here lately. From the various lease rates for gold, it looks like to me that that money is being put into a calendar spread. Inescapable conclusion: I have no idea what I am talking about. But if I did know what I was talking about, I would say that this looks extremely, extremely bullish for gold, and that the temporary fall in the price of gold is a fabulous buying opportunity.
But it is more than that, as Billy, one of the guys I play racquetball with and who likes trying to make a little money by playing in some market or another, or hatching some business deal, or exploiting some price discrepancy, or some exploration or something, it´s always something, but never gold, is suddenly interested in gold. After all this time. He says he has heard some good things about gold and is convinced enough to get some. This is how manias begin, not how they end.
Richard Daughty
email: scgcjs@gte.net
Daughty Archives
The Daily Reckoning
Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron´s, The Daily Reckoning and other fine publications. |
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User ID: 4420
7/9/2005 1:31 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Federal Deficit Reality: An Update
by John Williams, Executive Editor
SHADOW GOVERNMENT STATISTICS
www.shadowstats.com
July 7, 2005
U.S. Treasury Shows Actual 2004 Budget Deficit at $11.1 Trillion
Ultimate Crisis for Dollar Moves Beyond Possible Remedies
Hyperinflation and New Gold-Based Currency
System Are Likely Consequences
Foreword
From time to time, the U.S. financial markets manifest some concern about the nation´s twin deficits -- the federal budget and the current account shortfalls. These episodes have been short-lived, however. Generally, the markets have been very sanguine about these problems -- much too sanguine, in our view! We believe there is a great deal about which to be concerned in both areas, and that longer run, the U.S. markets will indeed reflect it -- negatively, of course. This article updates our thoughts, etc. on the federal budget deficit.
___
When the U.S. Treasury reported the official 2004 federal budget deficit at a record $413 billion last October, the hisses and boos in the financial media were unrelenting. Two months later, the Treasury reported the actual 2004 deficit -- using generally accepted accounting principles (GAAP) -- was really an incredulous $11.1 trillion [1], up from $3.7 trillion in 2003, yet nary a word was heard in the financial media, from Wall Street or from any political denizen of that former malarial swamp on the Potomac. An exception, of course, was Treasury Secretary John Snow, who signed the government´s financial statements, but the data release was as low key as physically possible.
The silence partially reflects the financial-market terror that would accompany an effective national bankruptcy. Such is the risk when a government´s fiscal ills spin so wildly out of control that they no longer are containable within the existing system.
Consider the traditional solution of raising taxes. Putting the $11.1 trillion deficit in perspective, if the government raised individual and corporate income taxes to 100%, seizing all salaries, wages and profits, the government´s 2004 operations still would have been in deficit by trillions of dollars. The deficit has moved beyond practical fiscal control! Many in government and the markets are aware of the underlying deficit reality, but few dare to sound the alarm, for the ultimate resolutions to the situation all are political or financial nightmares.
The government´s GAAP-based accounting generally is as used by Corporate America. It includes accrual accounting for money not yet physically disbursed or received but that otherwise is committed. The largest differences come from the bookkeeping related to Social Security and Medicare, where year-to-year changes in the net present value (discounted for the time value of money) of any unfunded liabilities are counted. In contrast, traditional deficit accounting is on a cash basis. It counts the cash received from payroll taxes (social Security, etc.) as income, but it does not reflect any offsetting obligations to the Social Security system.
For nearly four decades, officially sanctioned accounting gimmicks have masked federal deficit reality. Surpluses in trust accounts, such as Social Security, have been used to obscure the true shortfall in government spending. With less than one tenth of the actual deficit being reported each year, a cumulative negative net worth for the U.S. government has built up in stealth to a level that now tops $45 trillion, with total obligations of $47.3 trillion (more than four times annual GDP). The problem has moved beyond crisis to an uncontrollable disaster that threatens the existence of the U.S. dollar and global financial stability.
Indeed, the unfolding fiscal nightmare likely will entail a U.S. hyperinflation and a resulting collapse in the value of the world´s primary reserve currency, the dollar. With surviving politicians looking to restore public faith in the global currency system, a new system probably will be based on gold, the only monetary asset that has held public confidence for millennia.
This article updates and expands upon our original background piece on the topic, "Federal Deficit Reality", published in September 2004, and a special economic alert, "Financial Report of the United States Government (FY 2004)", which appeared last December. Portions of those articles are revised and incorporated herein.
Current Detail and Options
Where the official cash-accounting deficit for fiscal-year 2004 (year-ended September 30) widened by 10.0% to $413 billion, the broad GAAP-based deficit (including Social Security, etc.) blew up to $11.1 trillion (96% of GDP) in 2004, triple the 2003 deficit level of $3.7 trillion.
Much of the increase in the broad GAAP-based deficit was due to a set-up charge from booking the 2004 "enhancements" to the Medicare system. Net of the $6.4 trillion one-time increase in net unfunded liabilities, the annual broad deficit was about $4.7 trillion, which still would have been a shortfall with 100% taxation.
-----------------------------------------------------------------
U.S. Government - Alternate Fiscal Deficit and Debt (Source: US
Treasury; $s Are Either Billions or Trillions, as Indicated)
-----------------------------------------------------------------
Formal GAAP GAAP GAAP Tot. Fed-
Cash- Ex-SS With SS Federal Gross eral Ob-
Fiscal Based Etc. Etc. Negative Federal ligations
Year Deficit Deficit Deficit Net Worth Debt (GAAP)
-----------------------------------------------------------------
(Bil) (Bil) (Tril) (Tril) (Tril) (Tril)
------ ------ ------ ------ ------ ------
2004 $412.8 $615.6 $11.1* 45.9 $7.4 $47.3
2003 374.8 667.6 3.7 34.8 6.8 36.2
2002 157.8 364.5 1.5 32.1 6.2 32.7
-----------------------------------------------------------------
*$4.7 trillion, excluding one-time setup costs of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003
(enacted December 8, 2003).
-----------------------------------------------------------------
Nonetheless, the total numbers reflect something close to true liability. The new Medicare charges show how quickly politicians can make an already impossible situation significantly worse. By adding features to Medicare without setting up full funding for same, the Administration and Congress helped increase the total net present value of unfunded federal government obligations by 31%, from $36.2 trillion to $47.3 trillion in just one year.
In like manner, any "fix" to Social Security, such as raising the retirement age, would result in a one-time change to the unfunded liabilities, but the ongoing annual shortfalls would be affected only minimally. An annual minimum broad GAAP-based deficit of $4.5 to $5.0 trillion appears to be in place.
Wall Street hypsters recently have been touting how the official 2005 federal deficit will narrow from 2004, and the Administration is promising ongoing deficit reductions from the official 2004 level. First, if the economy falls into recession, which it appears to be doing, all such projections are worthless. Second, even if the promised cuts came to pass, after full reductions in an about-$4.5-trillion broad GAAP-based deficit, the mere billions saved would still leave the annual deficit rounded to about $4.5 trillion.
The impossibility of the current circumstance working out happily is why lame-duck Federal Reserve Chairman Alan Greenspan has been urging politicians in Washington to come clean on not being able to deliver promised Social Security and Medicare benefits already under obligation. He suggests, correctly, that there is no chance of economic or productivity growth resolving the matter. The funding shortfall projections already encompass optimistic economic assumptions.
The current circumstance also is why the Bush Administration has been pushing for Social Security reform, but the plans discussed do not come close to touching the magnitude of the problem. Most Congressional Democrats will not even admit there is a problem. Indeed, neither side of the aisle is willing even to mention the scope of the actual shortfall or talk about the Medicare problem, which is even worse than Social Security.
If the Administration and Congress were willing to address the unfolding fiscal Armageddon, only two very unpleasant general solutions are available:
* The first solution is draconian spending cuts, particularly in Social Security and Medicare, accompanied by massive tax increases. The needed spending cuts and tax increases are so large as to be political impossibilities.
* In the absence of political action, the second solution is tacit bankruptcy, with the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely eventual outcome is the Fed massively monetizing the U.S. debt, triggering a hyperinflation. U.S. obligations then would be paid off in a significantly debased and devalued dollar at literally pennies on the hundred dollars.
These alternatives are politically unthinkable and unspeakable for the Administration and Congress, hence the silence. Yet, these same political bodies are responsible for the current circumstance, along with the acquiescence of the financial community and an uninformed or disinterested voting public.
Decades of Deception -- Historical Perspective
Misleading accounting used by the U.S. government, both in financial and economic reporting, far exceeds the scope of corporate accounting wrongdoing that keeps making financial headlines. The bad boys of Corporate America, however, still have been subject to significant regulatory oversight and at least the appearance of the application of GAAP accounting to their books. In contrast, the government´s operations and economic reporting have been subject to oversight solely by Congress, America´s only "distinctly native criminal class." [2]
Nearly four decades ago, President Lyndon Johnson´s political sensitivities led him and the Congress to slough off some of the costs of an escalating Vietnam War through the use of accounting gimmicks. To mask the rapid growth in the federal government´s budget deficit, revenues from the surplus being generated by Social Security taxes were added into the general cash fund, without making any accounting allowance for the accompanying and increasing Social Security liabilities. This accounting-gimmicked reporting was dubbed "unified" budget accounting.
The government´s accounting then, as it is now, was on a cash basis, reflecting cash revenues versus cash expenditures. There were no accruals made for monies owed by or due to the government or to the government´s trust funds at some time in the future.
The bogus accounting understated the actual deficit for decades and even allowed for claims of budget surpluses in the years 1998 to 2001. While there were extensive self-congratulatory comments between the President, Congress and the Fed Chairman, at the time, all involved knew there never were any actual budget surpluses. There has not been an actual balanced budget, let alone a surplus, since before Johnson and his cronies cooked the bookkeeping.
The doctored fiscal reporting complemented the short-term political interests of both major political parties. Additionally, the ignorance and/or complicity of Pollyannaish analysts on Wall Street and in the financial media -- eager to discourage negative market activity -- helped to keep the fiscal crisis from arousing significant concern among a dumbed-down U.S. populace.
There were those, however, who believed the government´s bookkeeping should be as accurate as possible. In the 1970s, the then "Big Ten" accounting firms proposed setting up for the federal government an accrual accounting and reporting system similar to that used in the business community. Purchases of capital equipment, weapons and buildings would be booked as assets and depreciated, taxes receivable and accounts payable would better reflect near-term cash needs. Accrued liabilities, such as Social Security payments due in the future, would reflect longer-term cash-flow needs.
As the project progressed, GAAP accounting was applied to the government´s operations and prototype annual statements were published beginning in 1974. The appropriate accounting for Social Security liabilities, however, was discarded during the Reagan administration as being politically untenable.
Under the eventual mandate of Congress, the accounting project culminated in the U.S. Treasury publishing its first formal Financial Report of the United States Government for fiscal year 2000, consistent with GAAP, except for Social Security and similar accounts such as Medicare, Medicaid and the Railroad Retirement Fund.
The gimmicked accounting standards, as established during the Johnson era, still guide today´s official, unified budget reporting. To the credit of the current Bush administration, however, the later GAAP reports, published in April 2003, April 2004 and December 2004 for fiscal years 2002, 2003 and 2004, indicated for the first time since the 1980s what the Social Security and related numbers would look like if they were included in the accounting, just as corporations need to account for pension and retiree health benefit liabilities.
An Important Aside, Re: U.S. Government Economic Data
One of SGS´ more important missions is to analyze, then report on the poor and deteriorating quality of "official" U.S. economic data. This growing lack of quality and the attendant diminution of accuracy contributes to bad business and investment decisions -- even bad political ones.
In the June edition of the newsletter, we took our mission a step further with the following announcement:
"Due to popular demand, SGS plans to begin publishing an alternate, monthly consumer price index by fourth-quarter 2005. The index numbers will be set -- not subject to revision -- and usable in calculations in the same manner as the official CPI. A history going back to 1990 will be reconstructed, with a bridge to pre-1990 CPI reporting. Annual inflation in the new series will tend to run about three-percent higher than the government´s official inflation reporting of recent years.
"A full methodology will be published, in advance, and results will be replicable. The SGS index calculations will be fully transparent and based on publicly available data, not on massaged surveying by the Bureau of Labor Statistics, or over-modeled and over-theorized price levels. Further details will follow in upcoming newsletters. Comments and suggestions are welcomed."
Anyone wishing to learn more about this project and follow its progress is cordially invited to do so by letting us know at "CONTACT US". To help in properly responding to requests, we request that you provide your name as well as e-mail address. However, this is by no means obligatory.
Dollar, Debt and Hyperinflation
The financial-market counterpart to the federal deficit is federal debt, where gross federal debt was $7.8 trillion as of June 30, 2005. That level was $7.4 trillion at the end of fiscal 2004, of which $4.3 trillion was borrowed from the public and $3.1 trillion was borrowed from the government (i.e. Social Security). Therein lies the problem. There is and will be too much debt from the U.S. government for the financial markets to absorb and remain stable.
The burgeoning deficit means the U.S. government will be increasing its debt level significantly for years to come. Near term, the amount borrowed will increase more rapidly than the markets are expecting, with the economy slowing down and entering recession. The ultimate question is who will lend the money to the U.S. Treasury? The answer is not U.S. investors.
The Federal Reserve´s flow of funds accounts show that foreign investors, both official and private, owned 42.5% of U.S. Treasuries at the end of 2004, up from 18.2% at the end of 1994. In 2004, foreign investors bought 98.5% of new U.S. Treasury issuance. (See "A Look at Foreign Investment Behavior in the Latest Flow-of-Funds Data," courtesy of Gillespie Research Associates.)
Part of the reason for this relates to another deficit crisis the United States faces on the trade front, where an exploding trade deficit is throwing excess dollars into global circulation. By holding dollars and investing in Treasuries, instead of converting dollars to a local currency, foreign investors have been helping to fund much of the U.S. deficit.
The combination of the rapidly deteriorating trade and budget deficits guaranty this will change. At some point, willingness among foreign investors to hold dollars will evaporate along with the reality that currency losses are more than offsetting any investment gains. When sentiment shifts away from the greenback, not only are foreign investors going to stop buying U.S. Treasuries, but also they likely will dump their holdings of existing Treasuries along with the U.S. dollar. Such actions would lead to a sharp dollar decline, a sharp spike in interest rates and a sharp sell-off in equities. The question, again, is who is going to buy the Treasuries?
With new debt continually hitting the market, eventually the Fed will have to step in to buy the Treasuries -- as lender of last resort -- effectively monetizing the debt. The more the Fed monetizes, the greater will be the growth in the money supply, the greater will be the weakness in the dollar, the greater will be the rate of inflation.
Where the numbers already are there for this to happen, fiscal pressures will get even worse. Already, the Pension Benefit Guaranty Corporation looks like it needs a federal bailout. As the economy deteriorates, the Congress or the Fed will step in as needed to prevent the collapse of any major financial institution that would threaten the system. Such action, though, will prove fiscally expensive.
The Fed let the banks fail in the 1930s, which helped intensify a decline in the money supply. That in turn was given major credit for deepening the Great Depression. The Fed will try to avoid the mistakes of the 1930s, but, in the process, it likely will end up triggering a hyperinflationary depression.
Last year, we discussed in some detail that the U.S. government´s sovereign credit rating of AAA more appropriately should be around B-, a below-investment-grade category, based on the 2003 GAAP statements ("Federal Deficit Reality".) Based on the 2004 GAAP statements, that rating now should be at C-, just above the default level. Never has an investment-grade overeign rating, let alone a AAA country, been supported by such negative extremes in underlying fiscal condition. Based on the latest numbers, the broad GAAP deficit for 2004 represents 96% of GDP, up from 33% in 2003, with total obligations now at 409% of GDP, up from 334% in 2003.
For political reasons, none of the rating agencies are likely to take a credit action against U.S. Treasuries under current circumstances, but that could change in the event of a major dumping of U.S. securities by those wishing to exit U.S. dollar exposure.
As noted by Fitch Ratings [3] in its Sovereign Ratings Rating Methodology: "Sovereign borrowers usually enjoy the very highest credit standing for obligations in their own currency. If they retain the right to print their own money, the question of default is largely an academic one. The risk instead is that a country may service its debt through excessive money creation, effectively eroding the value of its obligations through inflation."
Such has been the traditional cure for countries that borrowed so far beyond their means that they ended up with a choice between bankruptcy and hyperinflation. Hyperinflation seems to be the easier political route, although, for the first time, it will involve the world´s primary reserve currency.
In a hyperinflation, the currency very rapidly becomes worthless. In the classic case of the Weimar Republic of the 1920s, a 100,000-Mark note became more valuable as toilet paper than as currency; wheel barrows full of currency were needed to buy a loaf of bread; an expensive bottle of wine one night was worth even more the next morning, empty, as scrap glass. That is the eventual environment the United States faces because of its out-of-control fiscal madness.
For decades, "The deficit doesn´t matter" and "The dollar doesn´t matter" have been guiding principles in Washington. The deficit and the dollar do matter, greatly, as Washington, the U.S. public and the global markets will learn shortly.
A New Gold Standard?
The dollar, as we know it, soon will be history. Dollar inflation has been through a number of cycles since the founding of the Republic, but its current perpetual uptrend -- net of some bouncing during the Great Depression -- only began once the Federal Reserve was created in 1914. Now, with fiscal policy careening beyond any chance of containment, the Federal Reserve will get to oversee the U.S. currency´s demise.
It is not that the Fed wants to monetize the federal debt and trigger a hyperinflation -- the U.S. Central Bank certainly will do its utmost to avoid that outcome -- but it will have no politically acceptable alternative. The system otherwise would tend to right itself anyway through the economic shakeout of a hyperinflationary depression. While the Fed might hope to mitigate and to control the disaster, given the Fed´s nature, it is more likely to exacerbate conditions rather than to improve them.
When the dollar loses most of its value, through hyperinflation and/or currency dumping, the global currency system and economy will be in shambles, and a new currency system will have to be established. Those setting up the new system will need to establish its credibility, and there is only one monetary asset that can accomplish that: Gold.
Gold is the only commodity that has held up as a liquid store of wealth over the millennia. The amount of gold used to buy a loaf of bread in Ancient Rome still buys a loaf of bread today. In like manner, the amount of gold that bought a regular haircut for a man in 1914, still buys a similar haircut today. Where the public does not trust today´s politicians and central bankers, it does trust gold.
Whatever structure evolves for the new currency system, it most likely will have gold at its base. That is one reason that central banks rarely have followed through on threatened gold sales in recent years. The threats usually were nothing but jawboning aimed at depressing current market prices. Those countries holding the most gold will have the greatest advantage in any new currency system, and the central bankers know that, including Mr. Greenspan.
Timing of Related Currency and Financial Market Troubles
Central banks, OPEC, corporations and investors, both foreign and domestic -- as holders of U.S. dollars -- increasingly will sense or realize the greenback is headed for the dumpster. It only is a matter of when, not if.
The dumping of the U.S. dollar and/or U.S. debt by investors likely will hit quickly, with little advance notice. All the official actions that in turn could trigger hyperinflation would follow rapidly, with a full-fledged dollar collapse and developing hyperinflation possibly unfolding in a matter of weeks.
When this will happen is the tough question. It could be years; it could be next week. Without knowing the precise proximal trigger of the shift in sentiment against the U.S. currency, the timing is impossible to call. Nonetheless, some early warning signs may be evident in unusual anti-dollar activity in the currency markets, or in unusually sharp and unexplained spikes in the price of gold.
It would be extraordinarily surprising if the ultimate dollar collapse can be held off a decade, let alone three-to-five years. The pending global financial crisis conceivably could break in the immediate future, triggered possibly by one or more of the following developments: action by China to peg its currency to a basket of currencies instead of the dollar, OPEC pricing oil using a basket of currencies instead of the dollar, a sovereign credit rating downgrade on U.S. Treasuries, a major terrorist act, a very bad monthly trade report, a misstatement by an Administration official or some other event that may appear obvious in retrospect.
___
Footnotes:
[1] "2004 Financial Report of the United States Government." The full document is available as a PDF file at www.fms.treas.gov/fr/04frusg/04frusg.pdf. The table published in the Overall Perspective on page 11 shows the $11.1 trillion annual eterioration in the government´s net worth. As an aside, check the GAO´s auditor´s letter as to why they will not certify the statements.
[2] Samuel Clemens.
[3] Fitch Ratings website. |
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